Cyclical Stock: Meaning, Examples, Advantages And Disadvantages

Cyclical Stock: Meaning, Examples, Advantages And Disadvantages

A cyclical stock is a stock that is affected by changes in the overall economy and market conditions. As the economy goes through periods of expansion, recession, and recovery, these stocks experience fluctuations in value. Airline companies, hotels, retailers, restaurants, automakers, technology companies, banks, and manufacturers are cyclical stock examples. To make informed investment decisions, investors need to understand cyclical stocks. Here, we will discuss cyclical stocks' meaning and examples in this article, along with advantages and disadvantages.

What Are Cyclical Stocks? 

If you want to know ‘what are cyclical stocks? Here is the simple cyclical stocks meaning. So, a cyclical stock is one that is affected by macroeconomic changes in the economy or systematic changes in the market. Basically, cyclical stocks in India follow the economic cycle - expansion, rebound, recession, and recovery. Additionally, it's primarily shares of consumer staples companies that are cyclical. You will notice during a booming economy, consumers tend to buy these items more, but during a recession, they tend to spend less on them.
Moreover, it can be tricky to navigate the share market. Some stocks are highly vulnerable to economic downturns and slowdowns, while others may be profitable regardless of economic conditions, making them relatively recession-proof. The cyclical stocks refers to the fact that economic activities fluctuate continuously through periods of boom and bust.

Also, there is no doubt that the Covid-19 pandemic has had a cyclical impact on the stock market. As a result of the initial economic downturn, stocks sensitive to the economy declined. However, as the economy began to recover, most companies' shares rebounded. Furthermore, low-interest rates and government stimulus programs contributed to this upturn. Now that we understand what are cyclical stocks, let's examine cyclical stocks examples so that we can gain a better understanding.

Cyclical Stocks Examples

A cyclical stock is further classified as durable or nondurable. Generally, durable goods companies produce or distribute physical goods that are expected to last at least three years. A non-durable cyclical stock, such as clothing and prepared foods, is either short-lived, perishable, or rapidly consumed.

Moreover, there are several cyclical stocks in India, including auto manufacturers like Maruti Suzuki India and Tata Motors and banks like HDFC Ltd. Some cyclical stocks examples are given below:

Airlines and Hotels

Airline tickets and hotel rooms tend to be more expensive during strong economies, as both individuals and businesses tend to be more willing to spend money on them.

Retail

Consumers tend to spend less on discretionary retail goods during economic contractions. However, a retailer who sells essential goods is not subject to such cyclical fluctuations.

Restaurants

When economies are poor, people eat at home more often, and F&B stocks often suffer.

Automakers

During recessions, consumers tend to keep their cars longer, while during prosperous times, they tend to buy new ones.

Technology

Stocks in the tech sector tend to be cyclical.

Banks

The recession reduces demand for banks' products, such as mortgages, auto loans, and credit cards, and consumers who already owe money struggle to repay it. During recessions, interest rates tend to decline, causing bank profit margins to shrink.

Manufacturing

When the economy is struggling, physical goods manufacturers typically experience a decline in demand.

After understanding the cyclical stocks meaning and getting some examples, let's discuss their advantages and disadvantages.

Advantages Of Cyclical Stocks

The following are advantages of investing in cyclical shares:

Value Opportunities

In times of economic downturn, cyclical shares can become undervalued. Thus, it can offer valued opportunities for investors who are able to identify stocks that are fundamentally strong and have long-term growth potential.

Diversification

You can diversify your portfolio by investing in cyclical shares. This is done by adding exposure to industries that aren't correlated with other holdings.

Dividend Income

Some cyclical companies pay dividends that can provide steady income during good and bad times.

Inflation Protection

As commodities' prices rise with inflation, certain cyclical sectors can protect against inflation.

Potential For Growth

As the economy grows, cyclical shares have good growth potential. In addition, cyclical industries like construction and manufacturing get more demand.

Disadvantages Of Cyclical Stocks

Although cyclical securities offer potential advantages, they are not without disadvantages. Here they are:

Timing

Investing in cyclical securities and predicting changes in business cycles can be quite overwhelming. As a result, investors may miss out on opportunities or lose money.

Risk

Due to their volatility, cyclical securities can have larger price swings than their non-cyclical counterparts. Additionally, it increases the risk for investors.

High Competition

The level of competition in cyclical industries can be quite high. In the end, this can result in lower profit margins, increased price competition, and reduced earnings for companies.

Company-specific Risks

As cyclical companies evolve, they may encounter company-specific risks, such as changing consumer preferences or technological advancements. As a result, their earnings and stock prices can be deliberately affected.

Conclusion

In cyclical stocks, the value fluctuates depending on economic and market conditions. A good example is the airline, hotel, retail, automaker, technology, banking, and manufacturing industries. Moreover, it is advantageous to invest in cyclical stocks because they provide value opportunities, diversification, dividend income, inflation protection, and growth potential. 
Nevertheless, timing the market, higher risk, competition, and company-specific risks are disadvantages. However, the blinkX share market app provides real-time data and insights to help investors navigate the stock market. To make informed investment decisions and manage risks effectively, it is essential to understand cyclical stocks in India.

Cyclical Stocks FAQs

Before selecting a cyclical stock, pick an industry that is due for a bounce. Choose companies that seem particularly attractive in that industry. Also, it is often safest to invest in the biggest companies. Although smaller companies carry more risk, they can also produce impressive returns.


 

Banks are cyclical.

There are many benefits to investing in cyclical stocks, including value opportunities, diversification, dividend income, inflation protection, and growth potential.


 

Yes. A cyclical stock in India is quite volatile and follows the most popular economic trends.

The best time to invest in cyclical stocks is when interest rates are decreasing, as declining rates stimulate the economy. During rising interest rates, cyclical stocks are less likely to perform well.