CYCLICAL STOCK

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A cyclical stock is an equity whose price is affected by the ups and downs in the overall economy. It typically relates to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession. These stocks are usually traded heavily as investors try to buy them at low point of a business cycle and sell them at the high point of the same cycle.

Shares of car manufacturers, luxury goods makers, clothing stores, airlines and hotels can be termed cyclical in nature. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop and travel. When the economy is doing poorly these discretionary expenses are the first things consumers cut. If a recession is very bad, cyclical stocks can become completely worthless as companies go out of business.

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