Cyclical companies / cyclical stocks

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    A cyclical company is a firm whose share price is closely aligned with economic fluctuations. For example, during periods of economic growth, cyclical companies will do well but during downturns they will see their earnings decline.

    What type of companies are cyclical companies?

    In contrast to defensive companies (which usually offer essential products or services, such as food and utilities), cyclical companies normally offer non-essentials such as cars, holidays or other luxury items.

    When times are hard, people may decide that they cannot afford to buy a new car or go on holiday, but they will continue to buy their everyday essentials.

    What should investors be aware of when investing in cyclical companies?

    Investors need to be aware of the way in which cyclical companies and industries react to and are affected by changes in the economic climate. They can then use this knowledge to make sensible investment decisions.

    Some investors choose to invest in cyclical companies just before an economic growth period begins, enabling them to make the most of an increase in the company’s share price.

    However, although these companies can perform well during positive conditions, it might be more sensible to invest in defensive companies when things take a turn for the worse. Defensive companies will offer greater stability for your investment during such periods.

    Where can you find information about cyclical companies?

    You can monitor the financial press to find out the latest information about cyclical companies.