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How to Choose Good Stocks: Look for a Company with Patents/Trade Secrets

Aliya Sayyed May 03,2018 2099 2 min read

A company with patents/trade secrets is well protected from competition

What if your company was the only one allowed to make a particular product? No other company could produce the same product. If someone did, it would be illegal! That is exactly the power a Patent confers.

A Patent gives an exclusive right to the inventor of a new, innovative and usable product or process to derive benefits from it for a limited period of time. It protects your business as competition cannot copy your product. With a patent, however, you have to disclose all the information related to your unique product. And the life of a patent is usually a maximum of 20 years, after which anyone can produce the product.

So, what do you do if you do not want to disclose the way you make your product? This is where a trade secret comes in. A Trade Secret can be a formula, recipe, or process for making a certain product or providing a particular service. Unlike a patent, however, it is not limited to a particular time. Its life depends on how long you can keep it a secret.

A famous example of this is Coca-Cola’s formula for the soft drink, which has been a closely guarded secret for 122 years. A trade secret confers a slightly different advantage to a company. In Coca-Cola’s case, it has given the company a significant business advantage in the ‘carbonated drink’ market, as there is no other cola that tastes the same.

If a product is patented or has a trade secret, the company becomes the only one that can produce it. No other company can compete with it. Consumers who develop a preference for the product continue to buy it because the alternatives are not good enough. This leads to higher sales and consequently higher profits.

So, which companies have this moat? Obviously, the first thought that comes to mind is Pharma companies. Pharma companies like Dr. Reddy’s Labs, Sun Pharma, Cipla, Ranbaxy, and Biocon have patents for the new chemical compounds or compositions that they discover.

FMCG companies manufacturing personal care products like Procter and Gamble, Colgate, and Hindustan Unilever will usually have trade secrets (and some patents) for their products. Through R&D, these companies develop technologies that they claim perform a function better than the rest, e.g. cleaning our teeth, our clothes, making our hair grow stronger. This is also true of companies producing food products, like Britannia and Nestle India.

There are numerous possibilities in the food business to acquire this moat, because it’s difficult to copy a taste that is successful, and consumers feel that nothing but their favorite will do. Usually, these companies also build the brand moat to go with it, making the ‘total’ moat even better.

These companies usually spend a lot on R&D, around 6% of their turnover. This indicates the focus of these companies: the development of new and innovative products, a must for remaining successful over the long term. However, as an investor, you need to check whether this expenditure has yielded growing profits. So, look at the six critical parameters to know the financial track record of these companies. These are the stocks you should consider buying; naturally, at the right price.

Do any of your investments have Patents/Trade Secrets as their moat? Find a few companies which have this moat, and add them to your Stock Watchlist.

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Last Updated on Aug 01,2025

Category: Learning

Aliya Sayyed

Manager - Equity Research; Total 10 years works experience ranging from equity analysis, portfolio management, and financial planning. MBA in Finance. Passionate about equity research. Likes reading Finance, business, and classic fiction. Spends free time with friends and family.

SEBI Registered: Investment Adviser - INA000013323

Name of the IA registered with SEBI:	The Alchemists Ark Pvt. Ltd.
Logo:
Trade/Brand Name of IA:	MoneyWorks4Me Investment Advisers
Brand Logo:
SEBI Registration Number:	INA000013323 Validity - May 16, 2019 - Perpetual
Registration:	Non-Individual
BSE Enlistment No:	1187
Address:	B-101, Signet Corner Building, Balewadi Phata, Baner, Pune, Maharashtra 411045
Compliance officer Details:	Name: Shrikant Jagtap Email: shrikant.jagtap@moneyworks4me.com Telephone: +919860359463 Address: Same as IA
Grievance Officer Details:	Name: Mukta Vaze Email: mukta.vaze@moneyworks4me.com Telephone: +91 98609 19463 Address: Same as IA
Principal Officer Details:	Name: Atharva Bhide Email: atharva.bhide@moneyworks4me.com Telephone: +91 91758 99463 Address: Same as IA
Standard Warning:	Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Disclaimer:	Registration granted by SEBI, enlistment with exchange and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Warning: Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Disclaimer: Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provides any assurance of returns to investors.

Compliance Officer:

Name: Shrikant Jagtap

Email: shrikant.jagtap@moneyworks4me.com

Mobile No: +91 97638 00745

Grievance Officer:

Name: Mukta Vaze

Email: mukta.vaze@moneyworks4me.com

Mobile No:+91 98609 19463

Principal Officer:

Name: Atharva Bhide

Email: atharva.bhide@moneyworks4me.com

Mobile No:+91 91758 99463

SEBI regional/local office address -

Plot No. C 4-A , G Block, Near Bank of India, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra 400051

Address:

The Alchemists Ark Pvt. Ltd., B-101, Signet Corner Building, Balewadi Phata, Baner, Pune, Maharashtra 411045

Data provided by Accord Fintech Pvt. Ltd.

*Color code for outperformance consistency

*Number is average 3 year rolling returns

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How to Choose Good Stocks: Look for a Company with Patents/Trade Secrets

A company with patents/trade secrets is well protected from competition

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How to Choose Good Stocks: Look for a Company with Patents/Trade Secrets

A company with patents/trade secrets is well protected from competition

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