What is a cyclical company?
A cyclical company is a business whose success is determined by the economy.
Economic activity follows a cycle of fluctuations, known as the business cycle, and the share price of a cyclical company is closely linked to this. During an economic boom, cyclical companies will thrive, but during a recession they will be hit the hardest.
Where have you heard about cyclical companies?
Shares of cyclical companies are sometimes called cyclical stock. Some investors track the progress of cyclical companies against the economy, in order to make an educated guess at when to buy and sell cyclical stock for maximum return.
This can yield considerable profit, but timing is crucial and investors can easily make significant losses.
What you need to know about cyclical companies.
When an economy is declining, people become more concerned about their finances and will reduce their spending on non-essential items. This means things like travel, entertainment and hospitality see a significant downturn, all industries operated in by cyclical companies.
Industries such as utilities and tobacco are non-cyclical because they aren’t affected by these economic fluctuations.
Cyclical and non-cyclical companies and industries highlights the difference between what we need and the things we can afford to do without when our finacnies are being squeezed. Non-cyclical industries are more robust during a recession, so investors often increase their shares in such companies as Procter & Gamble and Gillette Co. whilst there are economic difficulties.
Find out more about cyclical companies.
Learn about the four stages of the business cycle with our guide, to understand why the economy goes through these fluctuations.