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It's been said that nothing is certain except for death and
taxes, but there are likely many people who feel that the
fluctuations of the stock market should be added to the list. It
is nearly impossible to find a stock or other investment that
doesn't fall in value at one point or another while you own
it... some even make a regular habit of it.
In order to get the most out of your investment experience, it's
important to recognize patterns in the performance of certain
stocks so that you can get a better feel for how long their
occasional fluctuations might last and help you to decide
whether or not you should sell the stock or see it through until
prices rise again.
Defining Cyclical Stocks
Cyclical stocks, as the name might imply, are stocks that
periodically fall in value and then rise again soon after. The
apparent cycle of gain and loss can be caused by several
different situations, from economic trends and seasonal products
to the stocks being issued by companies that do the majority of
their business during certain parts of the year such as holidays
or tax preparation season. In most cases these stocks don't
suffer a major loss over the course of the cycle, due largely to
the recovery that occurs later in the cycle.
Some cyclical stocks perform these actions in reverse, as
well... instead of falling in value, they increase the value of
their shares for a time and then the prices return to their
normal state.
The Fluctuations of Cyclical Stocks
Of course, the fluctuations of cyclical stocks tend to make some
investors shy away from making a major commitment to what tend
to be at best a form of seasonal investment. Individuals who are
looking for good short-term investments often consider these
fluctuations to be more of a godsend, however, and are much more
willing to invest larger sums during the low point of the cycle
in hopes of reaping greater rewards when the value of the stock
shares peaks. Of course, this plan isn't foolproof... changes in
the market or the economy can either stimulate or delay the
cycle, making the cycle start later or last longer.
Additionally, some cyclical stocks are only temporarily in a
cycle so investing in them with the hopes of their repeating of
past performance can cause problems with cycle planning when
they begin either rising or dropping in value and then fail to
recover or if they fail to do either.
Deciding Whether to Keep or Sell Cyclical Stocks
Of course, cyclical stocks can cause undue stress when their
value begins to fall... the decision must be made to either hold
onto the stocks until the value recovers or sell off at least
some of the shares of stock in order to avoid a potentially
large loss of investment revenue.
The decision remains up to the investor, but a well-diversified
portfolio that contains investments in cyclical stocks should be
able to bear temporary losses in stock value without a great
degree of difficulty since if the stock is truly cyclical it
will recover within a reasonable amount of time anyway.
Cyclical Stocks and Long-Term Investments
Of course, cyclical stocks can be used effectively for long-term
investments. The growth end of the cycle is usually increased
slightly with each revolution of the cycle, so investors who
choose to purchase cyclical stocks and hold onto them for a
number of years may find that when they finally sell them the
value is much higher than it would have been for short-term
investments.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
About the author:
John Mussi is the founder of Direct Online Loans who help
homeowners find the best available loans via the www.directonlineloans.
co.uk website.
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