Cyclical Stocks

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Definition of 'Cyclical Stocks'

Cyclical stocks are shares of companies whose earnings and stock prices tend to rise and fall with the business cycle. These companies are typically tied to the manufacturing, raw materials, and consumer discretionary sectors. When the economy is strong, cyclical stocks tend to do well, as consumers and businesses spend more money. However, when the economy is weak, cyclical stocks can suffer, as consumers and businesses cut back on spending.

There are a few reasons why cyclical stocks are more volatile than other types of stocks. First, cyclical stocks are more sensitive to changes in economic conditions. When the economy is strong, consumers and businesses are more likely to buy new products and services, which leads to higher sales and profits for cyclical companies. However, when the economy is weak, consumers and businesses are less likely to spend money, which leads to lower sales and profits for cyclical companies.

Second, cyclical stocks are often more leveraged than other types of stocks. This means that they have a higher debt-to-equity ratio, which makes them more vulnerable to financial distress during economic downturns. When a company is highly leveraged, it has a greater obligation to make interest payments on its debt, even if its earnings are down. This can put a strain on the company's finances and make it more likely to default on its debt.

Third, cyclical stocks often have lower dividend yields than other types of stocks. This means that investors who buy cyclical stocks are not receiving as much income from their investment. This can be a disadvantage during economic downturns, when investors are looking for stocks that can provide them with a steady stream of income.

Despite the risks associated with cyclical stocks, they can also be a good investment for investors who are willing to take on some risk. During economic expansions, cyclical stocks can generate strong returns. And, because they are typically priced more cheaply than other types of stocks, they can offer investors the potential for greater capital appreciation.

Here are some examples of cyclical stocks:

* Automakers
* Airlines
* Homebuilders
* Retailers
* Energy companies

Before investing in cyclical stocks, it is important to understand the risks involved. Investors should also consider their own risk tolerance and investment goals before making a decision.

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