Why Are Growth Stocks More Critical Than Ever In This Economy?

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Why Are Growth Stocks More Critical Than Ever In This Economy?

15 November 2021
 Categories: Finance & Money, Blog

You've probably seen the headlines about companies trading far above their weight classes. These companies are flavors of the week that, while potentially offering significant potential for investor profit, also present substantial risks. Unfortunately, these companies' rises (and subsequent falls) tend to make them media favorites, even if they aren't always the soundest investment choices.

Traditional growth stocks stand out in this environment partly because they offer high upside without the rapid swings found in those stocks driven mainly by internet fervor. Understanding how these stocks can add value to your portfolio is a critical part of investing in this economy.

How Do Growth Stocks Differ From Trendy Meme Stocks?

At first glance, growth stocks seem to have a lot in common with those blowing up internet forums. Both types of investments offer high upsides, some amount of risk and typically involve companies with high price-to-earnings (P/E) ratios. This final point is particularly crucial to understand since it's where these stocks also tend to differ.

P/E ratios are potentially valuable metrics, but they can be misleading without closer analysis. When dealing with trendy stocks, a high P/E ratio may indicate a company without much real-world potential. On the other hand, a higher P/E ratio is a common feature with growth stocks precisely because these companies have large amounts of untapped future potential.

As a result, growth stocks, although sometimes risky, aren't blind investments. Instead, investing in a growth stock means intelligently choosing a company with substantial potential for future growth. In essence, it means getting in on the ground floor with a company with real fundamental value not yet reflected in its share price.

Why Do Growth Stocks Matter Today?

Companies without much in the way of fundamental value often dominate headlines, and it can be challenging to know which options represent the potential for genuine future profitability. These companies might offer a quick way to make a buck, or they may lead to substantial losses. Unlike growth stocks, there's little (if any) expectation for growth in the company itself.

By investing in genuine growth stocks, you can build a portfolio with the potential for rapid profitability without putting your money behind companies that may not even exist in several years. You'll have the opportunity to gain a foothold in companies that produce actual products and contribute to the real economy.

However, recognizing which options have the most potential isn't always easy. Relying on expert opinions and analysis can help you discover investments you might otherwise ignore, helping you to create a diverse portfolio of innovative companies with an endless capacity for growth.

Reach out to professionals at an investment company like Lions Share Investing to get growth stock investing newsletters.