Cyclical vs. Non-Cyclical Stocks
In order to achieve a balanced portfolio of stocks both cyclical and non-cyclical stocks should be included to achieve the desired diversified portfolio. This should be done in order to be able to better face the changing cycles of the economy and the market as a whole. For instance, if the market moves toward bad conditions, defensive stocks should be used, moving away from the cyclical stocks that respond to the market changes.
Cyclical vs. Non-Cyclical Stocks
Non-cyclical stocks represent goods and services that consumers continue to use no matter what the state of the economy is. For instance, people will not stop using electricity or food just because the economy is in bad mood.
On the other hand, cyclical stocks encompass items that consumers purchase under the conditions of high economy confidence.
It is worth noting that the prices of both cyclical and non-cyclical issues are determined by the cycles of the business. Additionally, cyclical stocks are more responsive to the ups and downs of the market, whereas non-cyclical stocks provide greater protection against the downs of the market.
The more money the consumers spend, the higher the movement in the cyclical stocks. A typical example is the automobile industry. When the economy is stable and the people enjoy their high incomes, they are more inclined to purchase a new car. On the other hand, if the economy worsens consumers are willing to postpone the purchase of a new car until the conditions are better.
Additionally, under favorable economic conditions businesses are more likely to expand their activities in terms of purchasing new equipment and facilities, which makes the latter falling into the cyclical category. On the other hand, if the economy worsens businesses are less likely to make these improvements.
Also known as defensive stocks, non-cyclical stocks are famous for their good performance even in bad economic times. This is caused by the fact that the items and services included in this classification enjoy constant consumption by consumers.
A typical example is food consumption. No matter what the conditions of the economy are, people will still consume food to provide for their existence. Another example is the utilities sector. The same applies for electricity, water and gas consumption as for food consumption. However, in good economic times the returns from these stocks may lag behind.
Finally, if you are a more of a conservative type of investor, non-cyclical stocks may be the right choice. However, if you think that you can manage with the observation of the business cycle, cyclical stocks will provide you with good returns.
|Rate this article : Low
- Pick the Best Stock Type for You
- Dividend Yield Calculation and Drawbacks
- Book Value Explanation
- Dividend Payout Ratio Calculation
- Dividend Yield Explanation
- Stock Beta Value
- Operating Cash Flow Implications
- Stock Valuations - Key Interest Rates Relationship
- Price to Book Ratio Calculation
- Return on Equity Calculation and Drawbacks
- How to Benefit from Short Sellers
- Earnings per Share EPS Calculation
- PEG Ratio Calculation
- Simple Return vs Compound Annual Growth Rate Formula
- Price to Cash Flow Ratio vs Free Cash Flow
- Institutional Investors and Their Influence on Stock Trading
- Company Valuation Methods - Debt Evaluating
- Company Valuation Methods - Management Effectiveness Ratios
- Company Valuation Methods - Debt Evaluation Formulas
- Determining the Right Stock Price
- The Importance of Earnings in Evaluating Stocks
- Price to Sales Ratio Calculation
- Price to Earnings Ratio Calculation
- Cash Flow Valuation
- Calculate Return on Investment
- Relative Strength Indicator
- Non-Financial Characteristics of a Successful Stock
- Per-Share Price vs Market Cap
- Value Stocks vs Growth Stocks
- Identifying a Value Stock
- Small Cap Stocks Opportunities and Risks
- Stock Analyst Recommendations - Should We Trust Them?
- Value - Growth Stocks Comparison
- Investing in Hedge Funds: Pros and Cons
- Price to Sales Ratio (PSR) Explanation
- Funds of Hedge Funds
- Investing in Interval Funds
- How to Select a Winning Stock from a 52-Week List
- Earnings Estimates and Stock Selection