The Difference Between Cyclical and Non-Cyclical Stocks
February 8th, 2010 at 8:16 am Posted by The Dean
Have you ever heard of this term before? Perhaps you aren’t sure what it means? It actually isn’t very difficult to understand and once you know the difference between stocks that are cyclical and non-cyclical you can invest more wisely in the stock market as a whole.
Let’s take a look at each one to see how they work out. A cyclical stock is one that is closely related to how well the economy is doing. It will generally be related to a business sector that is very volatile according to market conditions. So for example a company which sells luxury goods may be more affected by a recession because people can do without luxury goods at this time. This means the stocks can go down in value as a result of the business not doing as well.
Conversely, a non-cyclical stock, as the name would suggest, is one that does not go in cycles. Thus it is more indicative of a stock that is steady regardless of what the economy might be doing. For example we all need healthcare no matter whether we are in the depths of recession or at the height of a boom. As such a healthcare stock is very likely to be a non-cyclical one, because it will do well whatever happens to be going on.
You can see then that non-cyclical stocks would seem to be the better ones to invest in to protect yourself from changes in the market. But this is not entirely true. While it is true that non-cyclical stocks are steadier and have the potential not to drop in value by a huge amount, they also do not experience huge jumps up in value. This means that if you are looking to make a bigger income from your stocks, cyclical stocks could be the better ones to opt for.
In practice many people go for a combination of the two. The non-cyclical ones protect you from big changes while the cyclical ones offer a better chance of making a bigger return. But you must be aware of what the market conditions are like and how a potential recession – or the end of one – could affect your investments.
Understanding how cyclical and non-cyclical stocks work and identifying the companies which fall into each category will help you to develop a solid investment portfolio that is suitable for you.
