A:

A pure play is a company that invests its resources in only one line of business. As such, this type of stock has a performance that correlates highly to the performance of the stock's particular industry. For example, many electronic retailers or "e-tailers" are pure plays. All they do is sell one particular type of product over the internet. Therefore, if internet buying declines even slightly, these companies are negatively affected.

The performance of a pure play may also be highly affected by the type of investing style that targets it. For example, if a pure play's line of business is favored by growth investing, the company will do well during a bull market, when growth stocks tend to outperform the market. Conversely, during bear markets, when a value investing strategy is historically more profitable, a pure play associated with growth investing will do poorly.

Pure plays can be contrasted with companies that have many diverse lines of business and diverse sources of revenue. For example, Tyco International is a large conglomerate involved in almost everything you can think of, from home security to plastics and adhesives. Because of this diversity within its product line, Tyco's stock performance, unlike that of a pure play, is not affected by one or two concentrated factors, but by many different variables.

Due to the nature of pure plays and their dependence on one sector of the economy, one product, or one investing strategy, they are often accompanied by higher risk. On the other hand, this higher risk brings the potential for higher rewards because when conditions are in their favor, pure play stocks can flourish.

RELATED FAQS

  1. Why should investors research the C-suite executives of a company?

    Learn how C-suite officers affect shareholders; discover how the CEO impacts financial performance and why governance is ...
  2. How does the risk of investing in the aerospace sector compare to the broader market?

    Learn how the risk of investing in the aerospace sector compares to the broader market and how investors use this information ...
  3. How does a pension income drawdown work?

    Understand what a pension income drawdown plan is, and learn the current rules governing pension income drawdown plans in ...
  4. What is the most important section in an investment company's prospectus?

    Learn about the various elements included in an investment company's prospectus and which ones are most important for investors ...
RELATED TERMS
  1. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
  2. Business Judgment Rule

    A legal principle which grants directors, officers, and agents ...
  3. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  5. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...
  6. Smart Beta

    Smart beta defines a set of investment strategies that emphasize ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Top Commodities ETFs for Your Retirement ...

  2. Savings

    Investing: How to Make Fast Money in ...

  3. Fundamental Analysis

    Young Investors: Should You Care About ...

  4. Investing News

    A New Corporate Governance Initiative ...

  5. Mutual Funds & ETFs

    Is Amazon a Prime Pick for Your Portfolio?

Trading Center