One of the most distinctive features of the stock market is the economic or business-related cycles. It is these features that mark the Boom or Bust phases of a stock market. Visit MultiBank Group
Since the economic conditions and changes brought in by the outbreak of wars, fluctuations in prices of gold and oil, inflationary tendencies and depression in the overall economic structure of the world tremendously impact the operation of stock markets, they turn susceptible to cycles.
Such cycles also result in the development of Bearish or Bullish tendencies in the share markets.
An operational share market has two types of cycles. They are:
i. Cyclical Stocks
ii. Non-Cyclical Stocks
Since Bust and Boom (or Bearish and Bullish tendencies) always take place in the share markets, these two types of stocks also turn very important for investors.
Depending on the global economic situation, these two types of cycles can range from six months to one year.
However, in the cases of an extraordinary global economic situation like the World War (i.e. World War-I and World WarII), wars between two or more countries, an international slump, economic crisis (i.e. Sub-Prime crisis), stagflation and global depression (i.e. The Great Depression ranging from 1929 till 1945), it may continue from five years to 10 years.
What Is A Cyclical Stock
Cyclical stocks are sensitive to economic cycles as explained above. The companies that are in direct relationship witha nation’s economywill be highly susceptible to the economic or commercial cycles taking place in that country.
The price movement of this type of stock depends on the policy decisions of the government of a country relating to the local economy, anti-inflationary measures, taxation, export and import policies and economic relations of a country with another country. Know more مجموعة ملتي بانك
The simple definition of a Cyclical Stock is a stock that directly depends on the economic cycles taking place in a country.
What Is A Non-Cyclical Stock
A Non-Cyclical share is basically a share or stock of a company. Such stocks are not impacted muchby volatility in a country’s economy caused due to external or internal reasons. This type of share is influenced by the performance of the company to which it belongs.
Also known as Defensive Stocks, this type of share(i.e. Non-Cyclical Stock)usually belongs to FMCG companies, household goods manufacturing companies or food manufacturing companies and similar mass utility products.
Difference Between Cyclical and Non-Cyclical Stocks
The Cyclical and Non-Cyclical stocks differ from each other. Following are the main differences between the two:
i. Cyclical stocks generate profit when the economy of a country booms with large volumes of external trade taking place. Non-Cyclical stocks don’t depend on this factor.
ii. While Non-Cyclical shares of different companies are not affected much by a country’s boom in overseas trade, the Cyclical stocks turn bullish during the expansion of a nation’s overall economy (mainly related to the GDP).
iii. Defensive Stocks or Non-Cyclical stocks can suit small investors in the bourse but Cyclical Stocks are usually preferred by the Bulls or heavy quantum investors.
iv. Defensive Stocks or Non-Cyclical stocks are preferred by fixed-income salaried investors whereas Cyclical Stock investors are Big Bulls or heavy investors.
v. The risk factor in Non-Cyclical is far less compared to the Cyclical Stocks.
vi. During phases of growing unemployment, closure of factors and low performance of the national economy, the Non-Cyclical Stocks command good demand in the bourse whereas the Cyclical Stocks are not influenced much by this. The reason why Non-Cyclical shares attract investment during the phases of mass-unemployment or downturn in a national economy is the fact that during such conditions, people mainly buy essentials of life driving good sales for the companies producing them. This is not the case with Cyclical Stocks.
vii. Usually, non-essential and luxury goods fall in the category of Cyclical Stocks. On the other hand, essential, food items, FMCG and medicine fall in the category of Non-Cyclical Stocks.
viii. Cyclical Stocks are volatile in the movement of their prices whereas Non-Cyclical stocks are less volatile.
ix. Cyclical Stocks are high-risk ones whereas Non-Cyclical stocks are less risky in nature.
What Are ThePros and Cons of Cyclical and Non-Cyclical Stocks
In the bourse, you have both Cyclical and Non-Cyclical stocks. Depending upon your investment and risk-taking capacity, you can have a portfolio of both Cyclical and Non-Cyclical stocks. You must know that both types of stocks are marked by a set of advantages and disadvantages. Know more MultiBank
A pointer-wise comparative study is given below:
· Return (Profit) Cyclical Stocks can be high but it is not so profitable in the case of Non-Cyclical Stocks.
· Cyclical Stocks are generally volatile in their price fluctuations. Non-Cyclical Stocks are not so volatile.
· Return or profit factor is not influenced much by the downturn in the national economy in the case of shares of Non-Cyclical ones. In the case of Cyclical Stocks, it is just the opposite.
· When you buy Non-Cyclical Stocks, you have varieties of options. Your portfolio can be quite vast. But in the case of Cyclical Stocks, your variety of portfolios cannot be so much diversified.
· Non-Cyclical stocks are usually considered safe. You may invest a smaller quantum of cash to buy them. It is just the opposite in the case of Cyclical Stocks. Such stocks usually require hefty investments.
The PL (Profit-Loss) factor is an integral part of the investment in the stock market. Depending on your investment capacity, you should always be selective in your portfolio of stocks. The reason for this is the fact that the PLequation is always associated with your selection of stocks. As a non-risk taker or small investor, it is always better that you go for Non-Cyclical stocks. If you are a Bull or heavy risk taker-cum-investor, you may opt for Cyclical Stocks. Both Cyclical and Non-Cyclical stocks have their relative merits and demerits in the fluctuation-driven operation of the stock markets.