Here is a closer look at their ups and downs, and how to balance the risks and rewards.A cyclical stock is one that will rise and fall with the economy. When the economy is strong, unemployment is low, and both production and consumer spending is high, cyclical stocks tend to gain in value. But when a weakening economy hits — causing businesses to contract and lay workers off, and people to shut their wallets — the value of these stocks goes down.
The common denominator of cyclical stocks? Their companies produce goods and services that are considered non-essential. They may be on the luxury side or the less-glam side . As a result, the companies that make these goods see a decline in profits, which then can result in a lower valuation of their stock shares. Some of the industrial sectors you'll find cyclical stocks in include:: When money is tight, consumers tend to put off purchasing new cars, putting off maintenance, replacing tires, or even driving unnecessarily. These actions create a decrease in demand for manufacturing and sales of raw materials, parts, and vehicles.
And sometimes sectors can change. For example, in 2018, S&P Dow Jones revised its Global Industry Classification Standard , which it uses to categorize companies for its stock indexes. It expanded the telecommunications sector to become a broader communications services sector.
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