Types of Economic Moats:
Some things in investing are easy to grasp.
PE ratio for example, is just the price of the stock compared to the earnings per share, pretty simple.
Or Market cap… which is just share price multiplied by shares outstanding.
Other concepts are a bit more nuanced.
And one that gets a lot of people stuck is the idea of an economic moat.
First of all, the word “moat” is not an acronym. It refers to the body of water which protected a castle from invaders.
When it comes to business economic moats are essentially the things that give a company an edge over its competitors…
And ultimately help it make more money in the long run.
Moats are vital because according to research by Morningstar, companies with strong quantifiable moats are proven to outperform the broad market.
There are several types of economic moats, including:
Cost advantage: This means a company can produce goods or services cheaper than other companies, which can help it offer lower prices and still make a profit. An excellent example of this is Wal-Mart, which is known for its low prices due to its efficient supply chain and economies of scale.
Network effect: This happens when a company’s product or service becomes more valuable the more people use it. Network effects have become more prominent in the internet age so we have companies like Meta or Uber, whose products are more useful as more people join and connect with others on the platform.
Intellectual property: This refers to a company’s patented or proprietary technology or other intangible assets like trademarks or copyrights. An example of this is Apple, which has lots of patents and trademarks related to its products like the iPhone and iPad.
Brand loyalty: This is when a company has a strong relationship with its customers, and they keep coming back to buy from them. Coca-Cola is a good example of this, as it has a long history of building strong relationships with consumers through marketing and advertising.
Government regulation: This is when a company has an advantage due to its relationship with the government. Utility companies like The National Grid are examples of this, as they may have a monopoly on certain services in a given region due to government regulation.
by Steve Macalbry of Bestgrowthstocks.com
Disclaimer: The author is not a licensed financial advisor and the content provided is for informational purposes only. Always consult with a licensed financial advisor before making investment decisions.