Basics of Stock Market - Beginner

How to Choose Stocks for Investing: Cyclical vs Defensive Stocks

We are not all investment gurus like Warren Buffett. If we have the right strategy and knowledge, we can all strive to be one. You can win even if great investors make mistakes. But if you learn to minimize risk and reduce your losses, you will prevail. It is essential that investors in the stock market are aware of all types of stocks. Stock picking is an important part of your investment journey. Investors will invest in both cyclical and non-cyclical stocks depending upon their risk appetite and necessity. You shouldn't be attached to your investments. Only a rational and rational decision, backed up by thorough research, will make you a successful investor. When investing in the sharemarket, it is an art. It is important to have patience.

You should be able to identify the factors that affect the performance of a stock when you decide to invest in it. The growth of a company is affected by many macroeconomic and microeconomic factors. It is important to do thorough research on the industry and economy. Before investing in stocks, it is important to do thorough research. The ''top down approach'' is when you invest in stock without taking into consideration the economic situation. Another type of approach is the ''bottom up approach''. This involves examining the company's history, financial strength, and other factors. First, the industry/sector is examined. Finally, the economy is reviewed.

You have a better chance of getting higher risk adjusted returns the longer you keep your investments in place. You can seek the advice of equity advisors and research experts if you don't know how to pick stocks or have limited time. Don't trust any advice as it could lead to losses. Make sure you have a clear understanding of your goals, risk appetite, and investment options before you buy shares. You will be able to monitor your portfolio continuously and keep track of how it is doing. This article will discuss defensive and cyclical stocks.

What are Cyclical Stocks and How Do They Work?

The performance of the economy affects the performance of cyclical stocks. These stocks give higher returns when the economy is growing. However, if the economy is in recession, they will return lower returns. This is illustrated by a simple example. People will spend more money when the economy is healthy. This will improve the real estate and automobile sectors. These companies will see a rise in demand, which means that they can sell more, which provides high returns.

Cyclical stocks have high beta, which means they are volatile. These stocks have high risk and high returns. They outperform during bull runs and are less successful during bear phases. These stocks are best for high-risk investors who want high returns. Cyclical stocks require extra caution as no one can predict the economic downturn or upturn. These stocks can either provide high returns or negative returns.

What are defensive stocks?

The performance of the economy does not affect defensive stocks. They pay regular dividends. These stocks can help you protect your investments in times of recession. You can invest in defensive stocks if you are a conservative investor who places safety first. Defensive stocks are not expected to provide extraordinary returns as they serve as safe haven stocks. These stocks are great for new investors. The volatility is low and they won't make you feel sleepless at night. Defensive stocks provide stable returns regardless of economic performance.

A portfolio that includes both defensive and cyclical stocks should be balanced by an investor. This will reduce risk and help to minimize loss.

Cyclical vs. Protective Stock:

FeaturesCyclical StocksProtective Stocks
PerformanceEconomy is dependentIndependent of economy
BetaMore than 1Below 1
RisquesHigh riskLow risk
VolatilityHighly volatileNot volatile
ExempleAuto and InfrastructureFMCG and utilities

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