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Finance Dictionary and Glossary of Investment Terms
Used to describe a stock that rises quickly when economic growth is strong, and falls rapidly when growth is slowing down.
The stock of a company which is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. Examples include the automobile, steel, and housing industries. The stock price of a cyclical company will often rise just before an economic upturn begins, and fall just before a downturn begins. Investors in cyclical stocks try to make the largest gains by buying the stock at the bottom of a business cycle, just before a turnaround begins. opposite of defensive stock.
A stock that tends to rise and fall with economic cycles. These tend to be stocks of firms that make heavy-duty items such as steel and automobiles, as well as firms such as airlines whose business increases in boom times. Other cyclicals include capital-goods makers (who supply manufacturing equipment), forest-products concerns and firms in the construction industry. The problem for investors is that cyclical stocks are usually a leading indicator -- in other words, they run up before an economic upturn, meaning you have to be prescient to really make these work for you. What''s more, expectations of a downturn can drag these same stocks right back down. Playing cyclicals effectively is a tough way to make a living.