Understanding The Nature Of Cyclical Stock
When many non-investors or new investors think of the stock market, they have cyclical stock in mind. They envision themselves buying low and selling high. This, in a nut shell, is what this type of stock is all about: gambling and winning (or losing) big.
The Basics of Cyclical Stock
This risk is one reason why many people prefer to work with blue chip or value stock. Stock which moves up and down in value with the changing fortunes of the nation’s economy is considered cyclical. When the economy booms, it booms. When it hits a speed bump, cyclical stock decreases in value. If there is a recession, it takes a dive.
Which Stock is Cyclical Stock?
Since these types of stocks are directly related to the economy, they tend to be linked with companies whose fortunes are also related to the spending habits of the general public. While people always need food and laundry detergent, they can do without holidays, fancy clothes, and brand new cars. As a result, companies related to luxuries (tourism, car manufacturing, boutique clothing) suffer during this time.
Timing and Choices
Some people think they can time their stock purchases. While they do not necessarily look forward to a recession, this affords them the opportunity to ‘buy low.’ During the coming years, they hold onto these stocks, waiting for the recession to end and for the economy to improve.
A consumer planning to do this might want to work with a professional broker, especially at first. Should he or she choose not to go this route, it is a good idea to at least pay close attention to the market for a year or so independently. This is one way to get a feel for the movement of company shares and how they are behaving. If a name looks promising, do enough research to give you a background. Is this company new, or has it been around for a while? Newer firms might not fare as well during a slump and could end up going out of business altogether. In this case, cyclical stock prices will not just plummet; they will become worthless.
There will always be some examples of hotels, car manufacturers, and clothing stores which will weather any storm, while others will increase in value before a country emerges from recession. The trouble is in deciding which ones those will be. When your choice is a good one, cyclical stock can make you wealthy if you are prepared to wait.