A cyclical stock is a stock that’s price is affected by macroeconomic or systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery. Most cyclical stocks involve companies that sell consumer discretionary items that consumers buy more during a booming economy but spend less on during a recession.
What type of companies are included in cyclical stocks? –
Companies that have cyclical stocks include car manufacturers, airlines, furniture retailers, clothing stores, hotels, and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop, and travel. While when the economy does poorly, these discretionary expenses are some of the first things consumers cut. If a recession is severe enough, cyclical stocks can become completely worthless, and companies may go out of business.
Cyclical stocks rise and fall with the economic cycle. This seeming predictability in the movement of these stocks’ prices leads some investors to attempt to time the market. They buy the shares at a low point in the business cycle and sell them at a high point.
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