Delving into the stock market: The ins and outs of cyclical shares

Julie Brownlee, Fsp Invest, 19 Oct. 2015

Tags: cyclical, cyclical shares, cyclical companies, what are cyclical shares, investing, investing in cyclical shares,

If you want to invest in the stock market or already do, you may have come across the term ‘cyclical’ shares or cyclical companies.

So what does cyclical mean? And what difference does it make to you as an investor?

Read on to find out…

What are cyclical shares?

When it comes to the shares on the stock market, they tend to fall under two main labels:

  1. Cyclical; and
  2. Defensive.

These terms describe how the underlying business of a company and, in turn, their shares, perform in different economic conditions.

As the word cyclical suggests, these shares and companies tend to see their profits moving up and down with what’s going on in the economy.

So when an economy is booming and growing, profits of cyclical companies should also grow, On the other hand, when an economy is struggling to grow or contracting, profits of cyclical companies will also come under pressure and may even turn to losses.

Which companies are cyclical?

Cyclical companies include airlines and car makers, explain the experts at Money Week.

Cyclical companies tend to have high fixed costs. This means that regardless of how much money they make, they still need to cough up a lot of money to run their businesses. If demand drops, they still must cover these costs.

This means cyclical companies are very sensitive to demand, which the economy tends to determine.

As an investor, cyclical companies can do very well for your portfolio during good economic times. But when things aren’t so rosy, expect these shares to underperform.

So there you have it. The ins and outs of cyclical shares.

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