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Cyclical stock is a security that follows the ups and downs of the overall economy.  When the economy is going up, the cyclical stock’s price goes up.  When the economy is bad and falling, the cyclical stock’s price goes down.

Cyclical stocks are usually the stocks of companies that produce non-durable, discretionary goods and services.  These are typically companies such as auto manufacturers, airlines, hotels chains, restaurants, furniture retailers, and higher-priced clothing retailers.   When the economy is not doing well, people tend to postpone their travel, entertainment and large durable goods purchases. As a result, revenue for these types of companies declines, as does their stock prices.  If the economic slump is bad enough, these companies may go out of business.

On the upside, sales will increase when the economy improves and consumers have more discretionary income. The uptick in revenue will cause a corresponding increase in the stock price. In fact, cyclical stocks tend to have a very large upswing when the economy picks up.  This is what makes cyclical stocks attractive to investors.  Note though, it is very difficult to predict economic ups and downs.  Timing the market in this way takes a lot of investor analysis and experience, and there is no sure-proof method of avoiding risk.

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