There are many companies that trade on the stock exchange every day. These listed stocks can be divided into two types: cyclical and non-cyclical. Let's dive deeper into the first to learn more about cyclical stocks and their impact on investors.
Before we get into the details, let's first take a quick look at how an economy functions. An economy has four phases: peak, expansion, recession and recovery. A country usually experiences all four phases in a cyclical fashion. Let's now look at the economic trajectory. Now let's see "What are cyclical stocks?"
Commonly, a cyclical stock is a stock whose price follows the economic cycle. Macroeconomic factors, such as the economic performance of a country, can affect the price of such stocks. A cyclical stock, for example, is more likely to see a rapid rise in the peak and expansion phases of an economic cycle. Similar to the previous example, a stock that is cyclical is more likely to be valued when the economy is in recession or recovery mode is less likely.
Companies considered to have cyclical stocks may be involved in the production of products that are not essential to consumers. These goods are not essential to consumers, so they tend to be purchased only by those with sufficient disposable income.
This is why the sales of products made by cyclical stock firms experience a boom when the economy is strong. Consumers tend to save more and spend less when there is a recession. This directly results in a decrease in sales of products manufactured by cyclical stocks companies.
These companies are excellent cyclical stocks because they are involved in manufacturing automobiles. Because they have more disposable income, consumers tend to purchase cars when the economy is performing well. Automobile companies often experience low sales or a decline in sales during periods of economic recovery and recession.
There are many other examples of cyclical stocks, in addition to the automobile manufacturing companies. These are just a few.
- Real estate developers
- Luxury goods manufacturers
Hotels and Restaurants
- Large-scale clothing shops and other retailers
Let's now answer the question "What is a cyclical Stock?". Now let's look at some of its advantages.
The major advantage of cyclical stocks are the higher returns they generate during economic booms. These companies tend to outperform the broad market indexes. The potential for future growth with cyclical stocks companies is also higher.
It is much easier to predict the performance of cyclical stocks companies than it is to predict that of non-cyclical ones. An established company with a solid product portfolio will almost always do well in times of economic expansion or peak. You only need to pay attention to the macroeconomic factors in the country.
Now that you have seen the benefits of cyclical stock examples, are you a good investor? This question is difficult to answer. They can provide good returns, but they are also volatile and susceptible to unpredicted changes in stock prices. Cyclical stocks also carry a higher risk of losing your investment. These companies can experience dramatic falls in share prices during economic recessions, which could negatively impact your investment portfolio.
However, you should not invest in cyclical stock. These stocks are closely tied to the economy so you can invest in them for the short-term during times of economic prosperity. You can diversify your risk further by including a mix of cyclical and noncyclical stocks within your portfolio.