Most of us are familiar with the adage "what goes up must eventually come down." It is well known that stock markets fluctuate on a regular basis. Because of these market fluctuations, it is important for an investor to plan his strategy before he invests his hard earned money.
One of the ways that Stocks can be classified is on the basis of the type of business. Similar companies are grouped together for the purpose of comparison. These groupings can be called Sectors.
The Stock market can be classified into 11 different sectors. Two of these sectors are called defensive sectors and the other nine are called Cyclical sectors.
shares, representing these defensive components and services to consumers and businesses that can not be postponed, regardless of economic status. These stores will remain stable even in an economic downturn. They include items and consumables such as food, tobacco and oil. Even in difficult times, consumers still need food and energy, regardless of price. This stock is not as strong as the other strains.
However when the economy is expanding, the demand for utilities and consumer staples does not increase that drastically. Hence defensive stocks tend to lag behind in the market.
Cyclical stocks cover nine different sectors which are basic materials, capital goods, consumer cyclical, energy, finance, health care, technology, and transportation. These sectors are called cyclical because their value tends to move up and down depending on business cycles. The performance of these sectors is largely dependent on the economy.
Often, before an economic recovery, the share price of a cyclical business growth. The share price even fall just before the downturn begins. Thus, investment in cyclical stocks can give maximum benefit when the investor buys the stock just before the economy begins to turn upward.
The automobile industry is a good example of cyclical stocks. Consider the case of an individual that wants to buy a car. He will do so when the Market is in an upswing. This is because the individual would be more financially stable at that time. However when the economy is in a downturn, the individual would probably put off buying the car. This could be for a number of reasons that include layoffs or high interest rates.
It is important for an investor to keep a close eye on the current business cycle while creating his portfolio. He can have a mix of cyclical and defensive stocks. The cyclical stock will ensure that he gets good returns when the market is up. The defensive stock will ensure that his losses are minimized when the markets are down.
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