An investment comes with numerous choices and risks, and to withstand the economic environment without affecting the waves of market fluctuations is difficult. Monopoly stocks hold dominance in such a situation by retaining their profitability and market share. How do they maintain the monopoly in an unpredictable market? Want to learn more?
This article delves into the reasons behind the popularity of monopoly stocks, their benefits, risks, and their role in the Indian economy.
Before we move on to the blog, we would like to emphasize that the stocks mentioned here are in no way a recommendation. This is merely for educational purposes.
What are Monopoly Stocks?
Suppose you want to travel to a nearby city by bus. What will be your criteria for choosing a bus? You will check the ratings, reviews, and facilities available to book a bus. Because of the availability of multiple buses, the bus operators need to provide the best services at reasonable prices to stay important in the market and to make a profit.
Now, if you decide to go by train, you have only trains under Indian Railways to choose from. There is no other option or another company even if you are not satisfied with the service of IRCTC. So, do you think Indian railways will ever have to face a competitor?
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In India, there exist companies that have command over their respective industries or sectors in the market. Such companies have little or no competition in their industry. Such companies are the best choice for investors as their profits will always remain higher.
Monopoly companies can charge higher amounts without the fear of losing customers as there is no other option for customers to depend on. If the products or services they provide are essential products or services, the lack of competition along with demand will make the stocks of such companies more attractive to investors. Hence, monopoly stocks can withstand market fluctuation and take control of their profitability, market share, and pricing.
Suggested Read: All You Need to Know About Equity Trading
Reasons Behind the Formation of Monopoly Companies in the Market
Indian Monopoly Industry
Monopoly stocks were not built in a day. But how could one company become a monopoly in an industry or sector and maintain the status quo even while the whole industry is fluctuating? Let us explore some reasons that could lead to the formation of a monopoly company:
- Barriers to Entry: High barriers to entering a particular industry can cause barriers to new players in the market. These barriers may include patents, legal restrictions, or exclusive access to crucial technology or resources. In such a condition, the prevailing companies can work profitably without a threat from a competitor.
- Economies of Scale: You might be aware of the fact that the product cost of a single unit may go down if the number of units produced is going up. So, companies that can produce huge volumes of products have a competitive advantage over other companies.
- Control Over Scarce Resources: If a company controls the vital resources necessary for the production of a particular product, the company can effectively maintain a monopoly in the industry.
- Technological Advantage: A company possessing intellectual properties like patents or a formula for creating a particular product is another key factor leading to the formation of a monopoly company in the market.
- Government Regulations or Interventions: Some government regulations may impose restrictions on new entry into the market. For example, the collection of huge amounts of money to begin a company or to receive authorization from the government may impact the relatively smaller company to compete with larger companies. This can also lead to a monopoly in the industry.
- Predatory Practices: In some cases, a dominant firm may engage in predatory pricing or other anticompetitive practices to drive competitors out of the market and establish a monopoly position.
Benefits of Investing in Monopoly Stocks
Now you know what monopoly company stock is. From the first look itself, the investment in a company with a competitive advantage monopoly looks like an attractive investment. But let us now analyze why one should invest in a monopoly stock.
- As we have mentioned above, monopoly stocks mostly exist in industries or sectors where stable high demand and less competition. Hence, the investment in such a company ensures a steady return.
- Monopoly companies are less susceptible to the volatility of the market. Even during unexpected market downturns, monopoly companies can exert control over the pricing of their product or services. So even when the other stock goes down in the financial market, monopoly stocks can maintain their higher stock price and earn profits.
- Most of the monopoly companies have enough cash flow to distribute their profits as dividends to investors. So, monopoly stocks are a favorable option for investors looking for a stable income from the stocks.
- Monopoly companies maintain a strong market position for longer periods. They capture the major share of the market and expand their business. The long-term market appreciation makes monopoly stocks attractive options for investors aiming long long-term investment opportunities.
Risks of Investing in Monopoly Stocks
Like any investment, monopoly stocks, even though they maintain a favorable market trend, are not without any risks. So, let us discuss the risks that may impact the monopoly stock investment.
Regulatory Risks
As a democratic country, India always ensures the welfare and development of the people and the country. Hence, to balance the economic distribution and not favor any particular company or group, the government may bring about regulatory changes in the industry. Changes in government regulations may impact the operation and profitability of a monopoly company.
Innovation Concerns
Innovations in the industry are mostly the result of competition. The search for a means that is easier and cheaper than a competitor is the motivation for innovations and the introduction of new technologies. Hence, an industry with a clear monopoly will be stagnant in its technological advancement, which will eventually lead to long-term growth. Investing in monopoly stocks may not be good from a long-term perspective considering the innovative stagnation.
Dependency on Industry
If the industry faces a decline because of government policy or the shift in the demand to another industry, the performance of the monopoly stocks will suffer.
Hindustan Photo Films Manufacturing Company was a PSU monopoly in India that dominated the production of photographic films. With the advent of digital photography, the demand for traditional photographic films has been reduced. As a result, the relevance and the monopoly of HPF declined.
Valuation Concerns
Investors expect the continuous dominance of a monopoly company and spend more on their stocks. However, this investor mentality can lead to the overvaluation of the stocks. The company may fail to live up to these expectations due to market conditions, regulatory changes, or technological changes. Hence, the investors in monopoly should be aware of the overvaluation of the stocks before investing.
List of Best Monopoly Stocks in India 2024
These stocks are chosen based on their market capitalization, which represents the total value of a company’s outstanding shares.
It is important to note that market capitalization in no way guarantees a company’s performance or the returns from its stocks. However, it can be used as a criterion for shortlisting companies from within a sector. Investors should recognize that other factors, such as financial health, management efficiency, and market trends, play crucial roles in determining the actual success of an investment.
This stock selection should not be construed as investment advice/recommendations/offer/solicitation of an offer to buy/sell any securities.
We are providing here a list of top monopoly stocks in India and have taken the info from Forbes Advisor. This is simply a list of companies that maintain a monopoly in the Indian financial market and NOT an investment suggestion from Gap Up.
IRCTC
IRCTC has a good dividend track and has declared dividends continuously for the past five years.
In the financial year ending March 2023, IRCTC (Indian Railway Catering & Tourism Corp) announced a dividend of 275% per share, which translates to Rs 5.5 per share. With the current share price at Rs 1010.45, this means the dividend yield is 0.54%.
Reliance
In the financial year ending March 2023, Reliance Industries announced a dividend of 90% per share, which equals Rs 9 per share. With the current share price at Rs 2927.30, this means the dividend yield is 0.31%.
Reliance Industries has a strong history of paying dividends and has consistently done so for the past 5 years.
Computer Age Management Services (CAMS)
In the financial year ending March 2023, Computer Age Management Services announced a dividend of 377.50% per share, which is Rs 37.75 per share. With the current share price at Rs 2997.40, this means the dividend yield is 1.26%.
InterGlobe Aviation
The company has a dividend payment history. The price-to-earnings ratio is 24.49. The company holds the top position in terms of sectoral market capitalization, and the stock price tends to be less volatile.
Syngene International
Syngene International has the potential for capital appreciation with its 179.19% return over the past five years.
In the financial year ending March 2023, Syngene International announced a dividend of 5% per share, which is Rs 0.5 per share. With the current share price at Rs 730.70, this means the dividend yield is 0.07%.
Balakrishna Industries
The top position in the sectorial market capitalization and the efficiency in financial management make Balakrishna Industries an attractive monopoly company.
In the financial year ending March 2023, Balkrishna Industries announced a dividend of 800% per share, which is Rs 16 per share. With the current share price at Rs 2433.50, this means the dividend yield is 0.66%.
Balkrishna Industries has a strong history of paying dividends and has consistently done so for the past 5 years.
Z F Commercial
The company has remained debt-free for the past five years, which is a testament to its financial management expertise.
In the financial year ending March 2023, ZF Commercial Vehicle Control Systems India announced a dividend of 260% per share, which is Rs 13 per share. With the current share price at Rs 14402.45, this means the dividend yield is 0.09%.
ZF Commercial Vehicle Control Systems India has a strong history of paying dividends and has consistently done so for the past 5 years.
Dream Folk
The company recently declared a dividend of INR .5 per share on August 22, 2023. The price-to-earnings ratio of 38.75 suggests a reasonable valuation relative to the company’s earnings.
Aashi India Glass
For the year ending March 2023, Asahi India Glass has declared an equity dividend of 200.00%, amounting to Rs 2 per share. At the current share price of Rs 594.45, this results in a dividend yield of 0.34%.
The company has a good dividend track report and has consistently declared dividends for the last 5 years.
FAQs About Monopoly Stocks
What is a Monopoly Stock?
Monopoly stocks are the stocks of companies that operate in a market with little or no competition, providing them the ability to control the price and dominate the market.
Name a few Monopoly stocks in India in 2024.
IRCTC, Reliance, CAMS, InterGlobe, Syngene International, Balakrishna Industries, ZF Commercial, Dream Folk, and Aashi India Glass are some of the monopoly stocks in India.
Are monopoly stocks a better investment choice for long-term investment?
Monopoly stocks are suitable long-term investment options due to their consistent dominance in the market. Most of the monopoly stocks dividend to their investors, which also makes them an attractive choice. However, monopoly stocks are not guaranteed profitable investment. Like any other stock, its growth and potential profit depends on various external factors.
What are the risks of investing in a monopoly stock?
Valuation concerns, regulatory risks, innovation concerns, and dependency on industry are some of the factors that pose a threat to monopoly stock investment.
What are the benefits of investing in a monopoly stock?
- Steady return from the investment and pricing power
- A stable source of income due to dividend distribution.
- Long-term dominance in the industry makes monopoly stocks lead to long-term capital appreciation.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
