Stock market uncovered: The difference between cyclical stocks and defensive stocks

Julie Brownlee, Fsp Invest, 20 Mar. 2015

Tags: stocks, cyclical stocks, defensive stocks, what are cyclical stocks, what are defensive stocks, stocks to invest in, investing,

When you look at the shares that make up those listed on the stock market, generally speaking they fall into two main categories. They’re either cyclical stocks or defensive (non-cyclical) stocks.

So what is the difference? And are there times to invest in one opposed to the other?

Let’s take a closer look…

What are cyclical stocks?

Cyclical stocks are shares in sectors or companies that tend to perform well when the economy is in a sustained recovery or performing well.

In other words, what’s going on in the underlying economy drives the success of these companies.

An example of a cyclical stock is a mining company.

What are defensive stocks?

Defensive stocks, on the other hand, are shares in sectors or companies that tend to perform whatever the economy is doing. They tend to be in sectors that there’s always a demand for.

For example, defensive stocks could include pharmaceuticals, utilities and food retailers. No matter how bad the economy gets, people will still get sick, need power and telecoms, and need to eat.

What stocks to invest in?

When it comes to building your portfolio, it isn’t just as easy as jumping between cyclical and defensive stocks to see a return. But there is some sense in investing this way.

A core holding of defensive stocks makes sense in any portfolio. They’re more likely to give you consistent growth over the long-term. Cyclical stocks may add volatility to your portfolio.

As a savvy investor, you should keep in mind what characteristics different types of stocks can bring to your portfolio. You still need to do your homework before investing. A defensive stock can still be a bad investment.

So there you have it, the difference between cyclical stocks and defensive stocks.

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