It is common for the stock market to be affected by changing economic times, they have a direct impact, and the term cyclical stocks are closely related to this situation. As a stock marketer, one must know what cyclical stocks are and how different they are from non-cyclical and defensive stocks; these terms can often confuse the marketers easily, and you may miss a profit-making opportunity. So, let’s address this concept in the most basic and simple understanding to make it easy for you.
Cyclical stocks belong to the companies that are directly impacted by the change in economy or time. So, when a company is booming the market with their products as the seasonal demand is high, the share turnover ratio is high, which means higher stock price and increase in the graph. These are the opportunities where one needs to sell the stocks and book maximum profits. On the other hand, when the demand is less due to the seasonal conditions, the stock prices will soar, and the share turnover will significantly decrease, resulting in a downhill. In such scenarios, a stock marketer can see downhill in the graph and a perfect opportunity to buy the stocks. These stocks can later be traded when the seasonal demand is high.
Definition: Cyclical stocks are those stocks that are readily affected by the economic change or business cycle.
When we state the term economic change, did it light a bulb for you? We guess we need more clarity and justification for “Economic change” and its direct impact on the cyclical stocks.
A lot of times, there are a few economic changes by the Government or the pillars of the company, which can restrain the overall growth of the company. Such situations can also restrict the growth cycle during which the demand is high, and stock prices are expected to rise high. Such economic changes are often temporary and can cause disruption in business cycles, but it does not mean the damage is done permanently on your investment.
In such a situation, as an investor, it is important to conduct proper research inclusive of the company’s historical records, assessing the situation, and a vision concluding how long it will take the company to recover the loss and if it can.
Cyclical stocks are pure high-return products if good research is conducted. A sole reason for this is the business cycles that take the prices up and down. In cyclical stocks, the investors buy the stocks when the prices are low and sell them when the prices are high, and these prices are affected by the seasonal demand, which is why the investors expect high returns.
Cyclical stocks are easily identifiable as they are goods and services industries that are majorly involved in the seasoned business. Apart from seasoned business cycles, goods and services can also be termed as a luxury, and while it is not a necessity, luxury goods can still be making people buy. So, if you see a luxury good company listed, there is a chance you are stepping on easily identifiable cyclical stocks.
When you are investing in the stock market, a lot goes around predicting and gut feeling apart from solid research. Cyclical stocks help you predict the stock performance as the process works in a cyclical format. When the demand rise, the share turnover increases, and we can see a high stock float in the stock market; predicting this would have been difficult if the rise and fall of stock prices were not directly related to the particular time phase or period. Similarly, you can predict the fall in prices and downhill graphs.
Cyclical stocks are prone to high risk as it works in business cycles that include severe fluctuations. High risk is involved when the production turns down during high demand; this could lead to an instant downhill on the graph. As we always state, with high returns comes high risk, and one cannot avoid this.
Companies are growing with new technology and gadgets, which gives a competitive edge over all the other companies. The profits are uncertain because of the competition though the demand is high.
A defensive stock is one that does not rely on the cyclical format of demand and supply; the concept works on regular demands and not alternatives. However, a cyclical stock is one that works in an alternate demand segment.
Defensive and Cyclical stocks are a lot different from each other, but over the past years, the cyclical stocks are converging into defensive stocks. The reason for the situation is a rise in competition and more privatization of companies. A classic example is the banking sector; earlier, the bank sector used to be in high demand with the latest economic changes, but now the privatization of banks has made the demanded regular which has significantly converged cyclical stocks into defensive stocks. Private banks do it through multiple luring schemes that attract consumers to buy loans though they don’t need them anymore.
Cyclical stocks work in seasoned-based demands in a cyclic order; these are the stocks that are readily affected by the economic change or business cycle. When a company is booming the market with their products as the seasonal demand is high, the share turnover ratio is high, which means higher stock price and increase in the graph. These are the opportunities where one needs to sell the stocks and book maximum profits.
Cyclical stocks have both advantages and disadvantages, which make them both luring and cautious. The best reasons to invest in cyclical stocks are to get high returns, easy to identify stocks, and easy stock predictions. However, there are a few disadvantages, such as high risk and uncertain profits.
Defensive stocks are quite the opposite of cyclical stocks as they are in regular demand and not in cyclic order. However, with the newest trends and competitive edge, cyclical stocks are seeing a converge into defensive stocks.
Cyclical stocks are those stocks that are readily affected by the economic change or business cycle.
Cyclical stocks work in cyclic order of seasoned demand and supply, while defensive stocks are those which are in regular demand.
For a long time, the banking sector was cyclical, but they are now converging into defensive stocks with the competitive edge of private bank sectors.