Understanding Cyclical and Non-Cyclical Stocks
The term cyclical indicates that something follows, relatively, predictable cycles. In the world of stocks, cyclical refers to the potential of a stock price to fluctuate with trends in the economy as a whole. Stocks whose share price tend to increase when economic times are good and decrease when economic times are bad are called cyclical stocks, while those with share prices that tend to be immune to economic upturns and downturns are called non-cyclical stocks. Investors need to understand the difference between cyclical and non-cyclical stocks in order to make informed decisions about trading stocks.
Cyclical stocks are typically those issued by companies in “non-essential” and “durable goods” industries. Since these companies produce goods and services that people can live without, their sales typically suffer during economic downturns. Then in economic upturns people will tend to begin purchasing non-essential and durable goods items again.
Some good examples of industries that tend to have cyclical stocks are the automotive industry, appliance manufacturers, and family chain restaurants. People tend to put off the purchase of a new car or a washing machine during tough economic times, unless absolutely necessary. Likewise families will typically refrain from dining out as much during economic downturns than they might during good times.
Non-cyclical stocks are typically those issued by companies that are impervious to economic turns, whether up or down. Solid non-cyclical stocks will be in companies that offer goods and services people either can’t live without, or have become so essential to modern life it would be overly difficult to do without them.
Good examples of industries that tend to have non-cyclical stocks are those that manufacture short lived, essential items such as toothpaste, soap, food (but not restaurants), cleaning materials, etc.
Non-Cyclical stock usually represent a good investment for long term holdings, and often times pay dividends. Cyclical stocks may or may not pay dividends depending on the economic outlook, but when bought and sold at the proper times can provide a very good return on investment.