Many people define cyclical and non-cyclical stocks as the offense and defense strategy in investing. Basically, both cyclical and non-cyclical stocks refer to how their prices move as the business cycle changes.
For the new investors, the easiest definition of cyclical stocks is they are the stocks which more drastically every time the business cycle moves, either up or down. On the other hand, the non-cyclical stocks usually show a little movement relative to the cycle.
Understanding Cyclical and Non Cyclical Stocks
Before we dig any deeper into those stocks. We need to discuss two main divisions of business sectors, first, since it will help you understand those two stocks.
The division of those business sectors depends on the product they produce. There is a business that produce things that you cannot purchase when your budget is very tight, like a new car. Meanwhile, there are other businesses that produce things you always need, like toothpaste and toilet paper.
Cyclical stock represents items and services that are bought by consumers and businesses when there is high economy confidence. On the other hand, the non-cyclical stocks represent items and services that consumers and businesses can’t put off no matter what the state of the economy.
Non- Cyclical Stocks
They are the stocks that will do well even in an economic downturn. The demand for their products and services will stay regardless of the economy.
Utilities are the easiest example, everyone always needs water, electricity, and gas, thus, even during an economic downturn, their return is steady. However, when the economy is growing these stock has the tendency to lag behind.
Also read: Relation between Stock Market and Economic Cycle
Cyclical Stocks
Cyclical stocks, contrarily, always follow the upward turn of the business cycle. The easiest example of this type of stock is automobile companies.
When the economy is good and people have jobs, then the sales of the car is also good. Yet, when there are a lot of layoffs and high-interest rates, people usually will hold on their existing car.
