Suvin Mehra had recently started investing. While he was conversant with the basics of investing, he had often heard experts talk about the cyclical socks being a preferred choice for investing as they had been beaten down.

Cyclical stocks are often recommended when the economy is doing well and the market is starting to boom. Forming a strategy on the basis of these stocks could prove to be lucrative for the investor.

What is a Business Cycle?

A business cycle is generally defined as a fluctuation in the economic activity which takes place over a period of time. It is marked by a period of expansion and recession

• In expansion phase, there is an increase in employment levels, production, sales and income.
• During recession there is a slowdown in production and sales, rise in unemployment and a fall in income, the economy is in a contraction phase. However this is often on a macro scale.

Short Business Cycle

Companies often go through short business cycles during the festive season. In this phase, the consumption patterns differ; as some companies witness higher sales others and see a dip because of lower productivity.

Long Business Cycle

Several companies go through longer business cycles, which are in tandem with the state of the economy. For example: sales cycle of a car company.

Sectors classified as cyclical stocks

• Electronics
• Automobile
• Housing & Realty
• Airlines
• High-end apparels,
• Hospitality
• Furnishings and Home Decor

Generally the sectors engaged in the trading and production of luxury goods will feature under cyclical stocks as state of the economy is directly prop rtional with the expenditure made on these products.

Cyclical Stocks vs. Defensive Stocks

• The demand for cyclical stocks is elastic i.e. the demand for the stock changes with a rise or fall in the price in the
  economy.
• Irrespective of the expansion or contraction phase of an economy, the prices of defensive stocks still remain the same. For example, the dema d for FMCG products generally does not reduce irrespective of the fluctuations in the economy.

Takeaways

•  As the share prices of the cyclical stocks vary upon the economic situation, the provide the investor with ample opportunity to make money.
• Though investing in cyclical stocks is a high profit–high-risk game. Therefore a smart approach is to always have a mixed portfolio by investing  n cyclical as well as non-cyclical sectors generate stable earnings over time.