Cyclical Stock

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A cyclical stock will change in value depending on macroeconomic events. Demand is generally elastic for a cyclical stock because its value is correlated with economic events; a cyclical stock may be distinguished from a defensive stock, usually a staple product or service, that is impacted less by market fluctuations.

Cyclical stocks are more volatile than defensive stocks. For example, companies that specialize in hotels, travel agencies, and vehicle manufacturers typically have cyclical stocks. On the other hand, defensive stocks are less reactive to external shocks, because consumer demand for those stocks remains relatively constant despite changes in the status of the economy. For example, companies that manufacture essential household goods are defensive stocks.

When the economy is in a bull market or expansionary phase, investors tend to purchase cyclical stocks. When the economy is in a bear market or recessionary phase investors will divest from cyclical stocks in favor of defensive stocks, which are more likely to have consistent returns during an economic downturn.

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