Cyclical Stocks vs Non-Cyclical Stocks: How Can You Trade Them?
Not every stock is created equal. One of the biggest distinctions is cyclical vs non-cyclical?those that grow or decline alongside economic conditions and those that are less sensitive. In this article, we explore the key differences between the two, how to analyse both, and how to trade them.
What Are Cyclical Stocks?Cyclical stocks are those that rise and fall in line with the broader economy. They?re more sensitive to consumer spending and include those in the travel, automotive, construction, and luxury goods sectors.
Simply put, when consumers have more disposable income, they?re likely to buy new cars, travel abroad, or invest in home improvements. Demand boosts corporate earnings and pushes share prices higher. However, when consumers have less money or face economic uncertainty, they reduce and delay spending on these discretionary purchases, dampening company earnings and stock valuations.
Nike and Starbucks are good examples here?both are cyclical companies that see higher demand when consumers are in a stronger financial position and feel comfortable purchasing brand-name clothes or buying coffee on the go.
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