Stocks are classified on various parameters including risk, market capitalisation, dividend payment and fundamentals among others. One among them is price trend. As the name suggests, this classification is based on the stock’s price with or as against the company’s earnings. Read on to know more about these types of stock.

Stock types on price trends

Depending on price trends, there are two types of stocks:

Cyclical stocks

Defensive 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.

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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.

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