Business

Cyclical Stocks: Advantages, Disadvantages, and Examples

There are stocks that act defensive when the economy doesn’t look very well.  Those are called defensive stocks for obvious reasons.  And many conservative investors love them.  Meanwhile, there are stocks that fluctuate along with the market Forex Market Reports and the economy, and these are called cyclical stocks.

What are cyclical stocks?

Cyclical stocks include all the stock that tend to fluctuate along with the overall business cycle.  The prices of the stocks that belong in this group of stocks are affected by the slight differences in the economy as a whole.

More importantly, these stocks are those that are related to the companies that sell products available to the consumers during times of robust economy.  However, when recessions take place, the consumers will usually cut back down on such products with ease.  These products are usually those that people can just go without.

Timing the Market

There are investors who believe that the market is predictable.  These investors are the same ones who attempt to time the market.  What they do is buy stocks at the low point of the business cycle and then proceed to selling them during the high point.

Timing then becomes a very crucial factor when investing in cyclical stocks.  You have to ride the wave at the right time or Trading Hours you would end up stuck in an extended recession.

Cyclical stocks rely largely on the economy’s strength.  Because of this, they are considered to be more volatile that defensive stocks.  Even so, these stocks sport higher potential for huge growths in times of economic strengths.

Advantages

Cyclical stocks are those that sport bigger exposure to movements in the market.  The market sports numerous sectors, and even a larger number of companies that offer stocks in the vast market.  By investing in cyclical stocks, you have to the chance to ride the wave reach its highest peak.

Cyclical stocks provide higher profits when the economy is growing and performing strongly.  The more money that consumers have in their pockets, the more they can spend on discretionary items and services.  This just means that the companies’ stocks will also rise in value, paving the way for greater profits.

When you buy cyclical stocks early during a market turnaround can result to strong returns.  You can try to stay a few steps ahead of the economic conditions and anticipate the growth in GDP by tracking and analyzing relevant indexes and financial indicators.

Disadvantages

 Since it relies largely to the economics movements, volatility is high.  To add to that effect, even the slightest movement in the economy can extremely affect the stocks of the company.  Even if the stock rises, it does not entirely guarantee stronger consumer purchasing power.  That means you’re never sure of the overall condition of the stocks.

Examples of Cyclical Stocks

Companies that have cyclical stocks can be classified into three categories, which are durable, non-durable, and services.  Here are some examples of companies that fall under each category.

Durable Goods

  • Ford Motor Company
  • Whirlpool Corporation
  • Ethan Allen Interiors Inc

Non-Durable Goods

  • Target Inc
  • Nike Inc
  • Nordstrom Inc

Services

  • Walt Disney Company
  • Time Warner Inc
  • Netflix Inc