What are Cyclical Stocks?
Cyclical stocks are shares whose prices are affected by and move in tandem with market fluctuations following economic cycles.
The prices of these stocks tend to align with the economic market conditions.
This means that stock prices will rise when the economy is performing well, and fall when economic conditions deteriorate.
Risks of Investing in Cyclical Stocks
- Cyclical stock prices can decline much faster than defensive stocks when economic conditions are poor.
- During prolonged recessions, stock prices that fall over extended periods can place significant pressure on both companies and investors.
- Companies will face financial challenges over prolonged periods.
- Therefore, wise investors need to be prudent and cautious when selecting stocks in the cyclical stock category. If possible, choose companies that can withstand prolonged recessions and difficult times.
Rewards and Advantages of Investing in Cyclical Stocks
- Cyclical stock prices can rise faster than defensive stocks when the economy is performing well.
- Consequently, companies can increase their revenue and profits to achieve higher stock prices in a rapidly growing economic market.
How to Buy:
Many people commonly say buy at low prices and sell when prices are high.
However, it is not that simple. This is because investors find it difficult to predict when prices are at their lowest level (support).
Therefore, among the best strategies that can be applied are as follows:
- Do not anticipate or predict the support price, as you do not know how low a stock price will go or for how long it will continue falling. Unless the company has strong fundamentals. Rely on the company potential to continue growing.
- Instead, observe the economic cycle first — whether it is in an uptrend, downtrend, or swing.
- If the economy has reached its support level, wait for 3 to 6 months to ensure the economy has rebounded and is genuinely in an uptrend and growing.
- Then, you can look for and buy stocks that may yield profits in this rising market.
- Measure the company stock performance as well to ensure it is showing signs of growth.
- Identify whether these companies stocks have the potential to deliver the best returns. Then buy those stocks.
How to Sell:
For trading, set a target price for take profit, TP.
- During an uptrend, you have many target prices that can be set depending on your individual risk tolerance. For example, targets to achieve 30%, 50%, or 100% profit based on the stock purchase price.
- Sell your holdings gradually over time. For example, you buy a stock with potential in a large portion that allows you to hold. Then you can TP at different and higher price levels based on the price increase.
- At the same time, you also need to monitor quarterly performance and sell according to the stock strength.
Meanwhile, if holding for the long term, extend the holding period if the company performance exceeds market expectations (outperformed).
- This requires you to monitor the company quarterly performance and data consistently.
- Only sell if there are early signs of declining stock growth or an economic recession. Or if the investor has achieved the profit target set earlier.
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Frequently Asked Questions (FAQ)
What are cyclical stocks?
Cyclical stocks are shares whose prices move according to economic cycles — rising during economic expansion and falling during recessions. Examples include stocks in the automotive, construction, and tourism sectors.
When is the best time to buy cyclical stocks?
The best time to buy cyclical stocks is when the economy shows signs of recovery from a recession, that is, before the economic cycle begins to rise again.
What is the difference between cyclical stocks and defensive stocks?
Cyclical stocks are influenced by economic cycles and are more volatile, whilst defensive stocks such as those in the food and utilities sectors are more stable because demand remains high even when the economy declines.
How do you determine when to sell cyclical stocks?
Sell cyclical stocks when there are early signs of an economic recession, the company quarterly performance declines, or when you have achieved your predetermined profit target.
Understanding economic cycles and cyclical stocks helps you capitalise on investment opportunities at the right time for optimal returns.
Open a CDS account today to start investing in cyclical stocks on Bursa Malaysia and take advantage of economic cycles.
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