You may have heard the term “inflection point” or “investment inflection point” in financial conversations or articles. There is a lot of talk about inflection points, but what exactly are they?
An inflection point is a term for any event that causes a notable change or shift, either positive or negative, in any situation or status quo. In the field of finance, it relates to an event that significantly changes the trajectory or progress of an industry, economy, sector or company. As the state of the markets are constantly evolving and fluctuating day-to-day, an inflection point in this context refers not to every normal minor fluctuation in the market but to a more significant change that has widespread effects.
Inflection points often mean that significant and fundamental changes have to be made to that industry, sector, or company – or even an economy as a whole!
On a visual chart or graphic, an inflection point would be placed where the direction of a curve changes in a noticeable manner and can be attributed to a particular event or series of events. Examples of events that have caused inflection points for corporations are changes in governmental regulation (such as environmental regulations, tax regulations, and labor regulations). In the field of technology, the invention and widespread use of the internet resulted in a huge inflection point. In the case of the world economy, stock market crashes such as the infamous Wall Street Crash and the 2008 financial crisis led to inflection points with profoundly negative results. Climate change could potentially cause the next big inflection point for the global economy, and will likely require fundamental changes to market operations. However, most inflection points aren’t quite as dramatic.
If you are an investor, an inflection point may cause you to consider changing your level of investment in a particular market, or even removing all investment from that market entirely! Investors in video rental chains such as Blockbuster would have been profoundly negatively affected by the advent of streaming services like Netflix and Amazon Prime, and therefore would likely have responded to that inflection point by changing their investment strategy!
However, investment inflection points are not always negative. A change in the market can come with new opportunities for investors. Early adopters of the internet earned huge fortunes from actions as simple as domain name purchases. The ability to predict upcoming market trends and investment inflection points can lead to huge profits, so it is always wise to follow the market and pay close attention to the sector that you are investing in or considering investing in. Upcoming inflection points can be a good reason to invest in certain stocks that are about to grow significantly, or when a risk inherent to that stock has been eliminated. Consider which companies or sectors are likely to become profitable in the future, and consider making these stocks targets for acquisition. As with all investments, it is always worth planning long-term for the best results, and research usually ends in reward.