Stock types on price trendsDepending on price trends, there are two types of stocks:
What are cyclical stocks?Cyclical stocks are those whose fortune swing according to the cycle of the economy. Depending on the economy’s movement, the value of these stocks moves up and down. Mostly, these stocks belong to firms which sell discretionary items.
It is essential to note that discretionary items are purchased when the economy is moving up and are cut down when it’s sliding. For example, when the economy is performing well, stocks of companies, primarily into automobiles, clothing stores, airlines, etc., witness an increase in demand when the economy is performing well.
On the contrary, their demand goes down when the economy isn’t performing too well. Also, when this happens, the price of these stocks goes down. If observed closely, volatility quotient in cyclical stocks is quite high. Having said that, the returns from these stocks are also higher.
What are defensive stocks?As the name suggests, these stocks are defensive in nature. In other words, they are immune to the economic conditions and no matter what’s happening in the economy, there’s always a demand for these stocks. For instance, stocks of companies such as pharma, FMCG, cement and food, etc., are never out of demand.
Simply put, there is a continuous demand for the stocks of these firms, no matter how the economy performs. Also, having these stocks in the portfolio means a hedge against volatility. You can use them to cushion your portfolio during market swings. Stocks of these companies will always find takers. Also, the rise in disposable income pushes up the demand for these stocks.
It is also important to understand that stocks of firms in diversified business also qualify as defensive ones. This is because when a business is diversified, a dip in the price of one stock is balanced out by another.
The final word
Financial prudence calls for having both cyclical and defensive stocks in your portfolio. While the former holds the potential to give you high returns in periods of economic boom, defensive stocks can hedge you against volatility. No matter which ever stock you pick, make sure to research thoroughly about company fundamentals to make an informed choice.
Click here to get started with your stock market investments.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
Income Tax Benefits on Costs of Education under Section 80E
With the proliferation of new career opportunities, getting the right professional skills has become immensely important over the years.
Why Individual Health Insurance is a Must Buy Over Corporate Health Insurance?
It is a known fact that medical inflation is growing at twice the rate of regular inflation. While most salaried employees are entitled to health insurance provided by their employer, investing in individual health insurance, personalised to suit specific health conditions, has its merits.
What Is Trade Price In Stock Market & How Does It Work?
Also known as the market price, trade price of a commodity is the price at which it is currently selling in the market. In the context of trading, the price at which a share is being purchased or sold in the stock market at a given point of time is known as its trade price.
5 Types of Business Loan For Woman Entrepreneurs
There are now many different types of loans options in India for women wanting to explore their entrepreneurial dreams. Read this post to know 5 of the most popular options.