Companies do not exist in a bubble. They are the product of both consumer demand and their competitive environment. The most successful company is the one that grabs the biggest piece of the pie — known as market share — from the competition. But the company with the biggest market share doesn't necessarily make the best investment. Why is that?
The only way to make money with an investment is through growth. When you buy stock in a company, you purchase a set amount of shares at a specific price. The only way to make money from that investment is to sell the stock at a higher price. While there are many factors that influence stock price, market share plays a significant role. So rather than looking for the company with the biggest market share, the savvy investor looks for the company with the greatest potential to increase its market share in the future.
PC operating systems are a great example. Microsoft currently dominates the operating system market with more than 90 percent of the world's computers running on some flavor of Windows [source: Whitney]. But Microsoft's very large piece of the pie has been slowly nibbled away by Apple over the past decade, and the entire PC sector is shrinking as more consumers move to mobile devices. Which company's product offerings have the greatest growth potential? Again, there are many factors to consider, but market share trends should be part of any investment risk management equation.