CYCLICAL STOCKS

CYCLICAL STOCKS

Cyclical stocks are those that flow and ebb with the economy. Profits from these stocks can be of huge importance when the economy goes up but losses can be substantial during a downturn. This is in contrast with non cyclical stocks which are comparatively and relatively stable regardless of the state of the economy. As in football, investing is about developing and using strategies and tactics. It is hard to succeed with only a single method.

DEFINITION AND EXAMPLES OF CYCLICAL STOCKS 

Cyclical stocks, also referred to as offensive stocks are investments that follow the up and down trends of the stock market. When consumers are spending money, cyclical stocks values go up and when they are not, the value falls. 

Automobile entities are classic examples of cyclical stocks. When the economy is blooming and people are working, car sales go up as well and when there is uncertainty around the economy, unemployment rises, layoff happens and people may decide to hold their plans of further purchase. 

WORKING OF CYCLICAL STOCKS 

Businesses expand during good economic times. They buy new equipment, build new facilities and have money to invest in development and research. Contribution, equipment sales, real estate and technology companies are cyclical stocks. So are the companies in discretionary spending categories such as entertainment and restaurants. 

When the economy slows down and business runs down on inventory, put off the expansion plans and delay the purchases. Cyclical stocks in companies such as sales and steel manufacturing suffer and business slows down on its pace. This is why cyclical stocks are considered an offensive strategy in investing. You can use them strategically in hopes of generating more and high returns as quickly as possible when the economy is booming and in a good scenario. 

CYCLICAL VS NON CYCLICAL STOCKS

Non cyclical stocks or defensive stocks are stocks that are generally based on needful and essential items such as soap, toothpaste, food staples that people will buy even if the economy is low and going through a slow patch. These stocks do well in economic downturns since the demand for commodities and services continues regardless of the economic scenarios.

Non Cyclical securities represent those commodities and services consumers and businesses can’t do without. Utilities are another example. Businesses and Consumers need gas, water and electricity. When the economy is growing, on the other hand, these stocks tend to lag behind. 

SIGNIFICANCE FOR INDIVIDUAL INVESTORS 

To be a successful investor, you need a healthy balance of defensive and offensive strategies. This means your portfolio should include:

• Diversification by industry and size 
• A mix of bonds, stocks and cash 
• A mix of value and growth stocks 

Another strategy you can opt is to mix non cyclical stocks with cyclical stocks in your portfolio to counteract changing business cycles 

When investors understand that the economy might approach rough times, a downturn in cyclical stocks values, leading to reliance on non cyclical-cyclical stocks become less valuable. 

THE CRUX 

It pays to keep an eye on the business cycle to understand where it is and where it can go. For investors wanting a more conservative posture, non cyclical securities - many of which pay dividends too - should make up a good part of your portfolio. This includes companies such as Palmolive - Colgate and the Coca - Cola company. 

Know that this relative safety comes at a price, the price you pay for low risk is the low returns and a longer timeline to get to your financial goals. But in times of economic recession or turmoil, the safety factor can be a comfort for those who are nearing the age of retirement or who know they will need to access their funds sooner or later.