A cyclical stock is an equity security whose price is influenced by ups and downs in the overall economy.
Cyclical stocks are typically related to companies that delivers discretionary items which consumers can afford to buy mostly within an economic boom and cut back on during a recession.
Classification of cyclical stocks:
Consumer cyclical stocks can be further classified into durables, non-durables and services:
• Durable goods: Manufacturers produce and/or becomes distributor of physical goods having a predictable life of greater than three years.
• Non-durable goods: Manufacturers produce or distribute soft goods containing expected lifespan of less than three years.
• Services: covers a separate category of cyclical stocks, because these companies don’t manufacture or distribute physical goods.
Cyclical stocks are often considered as more volatile as compared to non-cyclical or defensive stocks, that seems to be more constant during periods of economic turndown. But, the stocks carry greater profit potential & chances of growth, as they have the ability to outperform the market throughout the periods of economic potency.