Investing in cyclical stocks
You can also achieve good results with cyclical stocks. But what are cyclical stocks? And how can you invest in cyclical stocks? You can read all about it on this page!
What are cyclical stocks?
Cyclical stocks are shares that move with the economy. When the economy is doing well, cyclical stocks often move up. When the economy is deteriorating, cyclical stocks often fall. But what is the best way to invest in cyclical stocks?
Where to invest in cyclical stocks?
You can invest in cyclical stocks with a broker. You can choose to include cyclical shares in your portfolio for the long term. It is important that you can hold the shares long enough. When the market does not perform well, the stocks decrease in value. With cyclical stocks you can therefore obtain a negative result for a long period.
You can also choose to actively trade cyclical stocks. That way you can take full advantage of the price fluctuations of these shares. It is even possible to speculate on a price drop, so that you can also profit from it when the economy is not doing well.
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Which stocks are cyclical?
Cyclical stocks are stocks that depend heavily on economic performance. One sector where you will find many of these stocks is the travel sector. People only go on holiday when they have sufficient income. When the economy is performing better, you will see that the prices of these shares often rise.
Stocks that deal with temporary workers are also very cyclical. After all, a company like Randstad earns its money from workers. Only when the economy is doing well will the demand for labour increase.
Furniture stores, restaurants, and clothing stores are also often cyclical. Are you wondering if a stock is cyclical? Then consider whether it is primarily a luxury product. If consumers can cut back on the product or service when the economy is bad, then the business is likely to be cyclical.
Travel stocks are often very cyclical
Using bèta: Cyclical or not?
Bèta is often used for investments. With Bèta you can properly determine how the share moves with the market. The Bèta indicates the correlation with the market. We also refer to this value as the systematic risk of the investment.
For example, with a Bèta of 1.2, the stock price falls 12 percent for every 10 percent that the economy declines. A Bèta above 1 indicates that the stock moves strongly with the market and is therefore cyclical.
With a Bèta of 0.8, the stock price drops only 8 percent for every 10 percent the economy declines. This share is therefore not very cyclical.
High beta stocks underperform in bad economic times.
Are defensive stocks better?
Some people choose to only invest in defensive stocks. Defensive stocks are not cyclical. Defensive stocks are often more stable and perform relatively well during a poor economic period. But what kind of shares are considered as defensive stocks?
Defensive stocks are shares of companies that provide services or products that are always in demand. Think of companies that produce food. Companies that produce stimulants such as alcohol and cigarettes often also fall under defensive stocks.
Does this make defensive stocks a better choice than cyclical stocks? Not by definition! Defensive stocks offer a more predictable return. This is reflected in, among other things, stable dividend payments. Nevertheless, defensive stocks do not always perform better: this is partly because they have competition from bonds. For many people it can therefore be interesting to invest in a mix of cyclical and defensive stocks.
Cyclical or defensive investing?
If you want to get the best results, do not put too much emphasis on the type of investment. You can achieve good results in both cyclical and defensive stocks. With both types of shares, it is especially important to check whether the shares are being traded at a discount. After all, that is where you ultimately make the profit!
Cyclical stocks are very volatile. If you manage to time the purchase moment well, you can achieve a good result. By actively trading and by continuing to analyse the economy, you can achieve better results with cyclical stocks.
What are the disadvantages of cyclical stocks?
Obviously, this also comes with a downside. Are you not paying attention? Then you can just see a large part of your assets evaporate. When a recession starts, cyclical stocks often perform the worst. It is therefore wise to keep an extra close eye on the cyclical stocks in your portfolio.
Recognizing cyclical stocks
Do you want to recognize whether a stock is cyclical? Then put the graph of the share next to the graph of, for example, the NYSE. In this way you can see to what extent the share price moves with the average development of the market. When the stock price reacts more strongly to economic prosperity & disaster, you are probably dealing with a cyclical stock.
Demand moves in waves
The economy is not growing in one strong line: the economy will generally grow gradually with the necessary declines. During a favourable economic situation there is usually a high demand for certain products, this is also called a boom. When the economy deteriorates somewhat, the economy is in a recession.
Cyclical stocks are stocks that are closely related to these waves in the economy. They are often more sensitive to economic developments and generally move up and down more strongly. With cyclical stocks, it can be difficult to maintain a stable stock portfolio: by using the right tricks you can still profit from these strong price movements.
Info: countercyclical stocks move against the economic trend.
How to benefit from an unstable stock price?
You can take advantage of an unstable stock price by using an online broker. With an online broker, it is possible to open both long and short positions. When you open a long position, you benefit from the rises in price and when you open a short position you earn from the price falls.
Because the transaction costs with online brokers are lower, you can quickly open and close positions on shares, so that you can take advantage of the strong movements that cyclical stocks usually make. It is important to time your trades well.
Strategy for cyclical stocks
Cyclical stocks can move strongly. Nevertheless, it is often also possible to make a good prediction of the future price for these shares. Long term, a cyclical share will mainly fall during an economic downturn and rise during an economic recovery.
Short term, you can often spot fixed patterns within these movements. For example, the price of a stock moves down between certain values and always finds resistance on the same line. By making smart use of orders, you can then make a profit by trading cyclical shares.
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Where can you best invest?
When you are going to invest in stocks that move strongly, it is wise not to do this physically. Constantly buying and selling shares can be expensive because of the transaction fees. However, by trading the shares through an online broker you can take advantage of both the upward and downward movements.
It is straightforward to start trading in CFD stocks with an online broker. Often you only need to enter a few details, and you can get started right away. My favourite broker to trade in CFD shares is still eToro because as a starter you immediately receive a risk-free demo of $100,000: with this you can immediately try out the possibilities of CFD trading in cyclical shares!
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Early and late cycle cyclical stocks
We can divide cyclical stocks into early and late cycle cyclical stocks. Early cycle cyclical stocks move directly with the economic situation. When the stock markets fall, an early cycle cyclical stock will immediately fall in value. A late cycle cyclical share does not move with the economy until later. When the economy falls, it takes a while for the share price to fall.
By analysing whether stocks are early or late cycle cyclical stocks, you can determine when it is smart to buy or sell the stock.
Can you predict market movements?
Cyclical stocks move with the economy. You would therefore think that this makes it relatively easy to predict the price development of cyclical shares. In retrospect, this seems easy: the problem, however, is that it is difficult to predict whether the price will fall or rise further.
Therefore, it is smart for most investors to invest in an index fund. With an index fund, you can periodically invest in a basket of shares. That way, you do not have to predict whether the economy is at rock bottom or at a peak. Would you like to learn more about investing in index funds? Then consult our article about investing in index funds:
You can divide cyclical stocks into three categories: durable goods, non-durable goods, and services.
Durable cyclical companies produce goods with a long lifespan. An example of this is a car manufacturer. When people have less money to spend, they quickly cut back on this type of large expenditure.
Another type of cyclical share are companies that sell non-durable goods: think of manufacturers of luxury sports shoes. When people have less money to spend, they are more likely to opt for cheaper alternatives.
Lastly, there are also service cyclical stocks. Especially many companies that are active in the entertainment sector suffer from a bad economy. People then have less money to spend on fun outings such as a visit to the cinema or an amusement park.