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Every trader in the stock market has a unique investment style and approach. Each strategy differs based on the individual’s financial objectives, schools of thought, analysis of the market, morals and principles, and other factors.
While some traders use diversification as their fundamental approach, others prefer investing all their funds into one stock or sector. A concept related to this in the world of investments is pure play. In today’s article, let us understand the meaning of pure play, its benefits and risks.
What is pure play?
Pure-play is an investment terminology used for stock market investments in companies operating in a single sector. They utilise all their resources and skills to provide one product or service or work in one industry.
These companies are the opposite of companies with varied businesses in multiple sectors. Companies operating in various sectors have diverse product and service portfolios to cater to different needs and customer segments. Pure-play stocks, on the other hand, focus on their niche to become market leaders in their industries.
An example of a pure-play company is Sun Pharmaceuticals Industries Ltd. It is a company that operates exclusively in the pharmaceutical sector. Though the company provides manufacturing and selling services, besides having a portfolio of medicines to treat different issues, it operates only in the pharma sector, making this a pure-play stock. Most pharma companies operate similarly.
Pure-play vs diversification
| Pure-play companies | Diverse companies |
| They focus on one product, one service or one industry. | They focus on a range of products, services and industries to cater to different customer segments. |
| These companies have a single source of income. | These companies are conglomerates and have multiple sources of business to generate revenue. |
| The objective is to master one industry and become a market leader. | The objective is to expand the business in different industries to get benefits from each of them. |
| Any unforeseen event in that industry can significantly affect the business. | Any unforeseen event in one industry will affect that particular line of business, but the company’s operations in other industries will make up for the loss. |
| An example of a pure-play company is IRCTC, which operates only in the railway sector. | Example: Reliance Industries has operations in petrochemicals, energy, natural gas, retail, entertainment, textiles, etc. |
Benefits of pure-play investments
- Since pure-play companies devote their entire focus to one particular industry, they gain special knowledge and competitive advantage to succeed in their business.
- Strategising plans in pure-play companies is easy as their target market is unambiguous.
- It is easy for pure-play companies to achieve economies of scale since their operations are focused on a single area, hence increasing efficiency.
- From an investor’s perspective, analysing a pure-play stock is simpler as it is straightforward and does not have multiple sources of revenue.
Risks of pure-play stocks
- Pure-play stocks are prone to high levels of volatility when there is a downturn in the industry in which the company operates. Any disruption in the industry significantly impacts companies, thereby affecting stock prices.
- Diversification is one of the primary ways to manage risks. But, pure-play companies work against this idea, making such stocks more vulnerable to risk.
- Since pure-play companies operate in a single market, their growth saturates after a specific point. Unlike diverse companies, pure-play firms do not have the option to expand horizontally.
- Pure-play firms often face heavy pressure from their competitors, especially from larger players in the market, making it difficult for them to retain or expand their customer base.
Bottomline
Pure-play is an investment strategy of investing in companies that operate in a single sector. While such companies give investors access to specific industries, pure-play investment involves high risk, too.
Pure-play stocks are subject to higher volatility as compared to regular stocks due to their limited operations. Hence, investing in such stocks requires a thorough analysis, especially about how such companies have withstood market downturns in the past.
FAQs
Pure play stocks are stocks that belong to companies with a single business line. These companies either focus on a single product or a single service or operate in a single industry.
The objective of such companies is to achieve expertise in one area and become market leaders.
Pure play works against diversification, which is the primary strategy for risk mitigation. Companies which focus on a single product or service get severely affected by changes in the industry, which will also impact the stock prices.
Amazon started as a pure play company. It was first an online bookstore and did not have any other product or service to offer. But today, Amazon is a diverse company, with businesses in E-Commerce, online streaming, web services and more.
The opposite of pure play is a conglomerate which has business in multiple sectors. Such conglomerates operate their business in different sectors, sometimes even in unrelated ones, to expand their market presence.
Reliance Industries, Hindustan Unilever Limited, Tata Group, etc., are all examples of Indian conglomerates.
Pure play retailers are those who have a single channel for selling their products or services. They either have an online store or an offline store, but not a combination of both.
They are opposite to brick-and-click retailers, who have both online and offline presence.