What Is A Cyclical Stock?
Cyclical stocks are ones that rises and falls with the business cycle in a predictable manner- majority of this is due to the buying patterns of people and industries based on the overall state of the economy. For example, hotel chains and retail stores are two prime industries that are considered “cyclical stocks”. When the economy is up, people are more likely to travel and shop, and conversely, when the economy is not doing as well, these luxuries tend to be the first to go.
For investors, it is important to understand how a cyclical stock works in relation to the economy in both a recession and economic boom. Investors can make the largest gains from cyclical stocks by buying them at the bottom of a business cycle during a recession, just before an economic turnaround begins. However, investors can also have huge losses by buying these types of stocks right before an economic downturn occurs.
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