There are many different stocks listed on the stock exchange. Not all of them follow similar trends, though. You may have noticed this when you were looking for good stocks to invest in the middle of a crisis, like the pandemic, for instance. Generally, in times of economic instability, the market tends to move down, while in times of prosperity and stable conditions, the market tends to perform well.
That’s just the broad outlook though. The market performing poorly does not mean that all the stocks listed are on a downtrend. Similarly, a good overall performance does not mean that all stocks are on an uptrend. Here’s where the concept of non-cyclical stocks comes in. Let’s get into the details and see what the non-cyclical stocks definition is and what some non-cyclical stocks examples are.
Non-cyclical stocks definition: What is non-cyclical stock?
Non-cyclical stocks are also known as defensive stocks. Why is that? Well, that’s because they tend to perform well even during an economic recession. In other words, they act like they’re on the defense, countering the general market movement even when an economic downturn is underway.
Now that we’ve gotten the non-cyclical stocks definition, let’s take a look at some non-cyclical stocks examples to understand what businesses comprise this section of the stock market. Generally, when the economy is performing well, consumers tend to splurge on luxury items like cards, expensive gadgets, and foreign travel. However, when there’s a recession, the demand for these luxury goods decreases. Instead, people direct all their spending prowess towards basic necessities alone, like food, water, shelter and other essentials.
Non-cyclical stocks belong to those companies that provide these essentials and necessities. Non-cyclical stocks examples include stocks of companies manufacturing and selling fast-moving consumer goods, petrol, or electricity, among other things. These products continue to be in demand irrespective of the state of the economy, because people need these products or services on a daily or a regular basis.
In addition to these essential goods, non-cyclical stocks examples also include items that are addictive, like tobacco or alcohol. Here too, irrespective of whether a recession is in place, these products continue to be in demand among the general public. As a result, the stocks of such companies generally tend to ride out the poor patches in an economy much better than cyclical stocks.
Advantages of non-cyclical stocks
So, we’ve seen the non-cyclical stocks definition and looked at non-cyclical stocks examples. Now, let’s venture to look into the benefits that non-cyclical stocks offer.
The possibility of stabler returns
Since non-cyclical stocks belong to companies whose products or services come with sticky demand, or demand that’s always there, they tend to offer stabler returns to the investor. That’s not to say that there won’t be any ups or downs in the price movements of these stocks. Those fluctuations are part of any stock’s movements. However, broadly speaking, non-cyclical stocks offer returns that are stabler than those offered by their counterparts, i.e. offensive stocks,
Less volatility and easy predictability
Given how the performance of non-cyclical stocks tends to always be generally good, it naturally signifies lower volatility. The products or services tied to these stocks are typically not majorly impacted by any major event, making the prices of non-cyclical stocks less volatile and more predictable. With cyclical stocks that follow market movements, it becomes necessary to understand how the market moves in order to forecast how the stock will move. This is not the case with non-cyclical stocks, which don’t follow the overall market movement closely.
So, now that you know what non-cyclical stocks are all about, the next question you may be pondering over as an investor could be this – should you invest in non-cyclical stocks? Well, that depends on your financial goals and your investor profile. If you’re a beginner who hasn’t yet grasped the nuances of reading market trends, you’ll find that non-cyclical stocks are easier to forecast, since they’re not subject to any major fluctuations. Also, if you possess a lower risk appetite, you’ll find the stabler returns from these stocks meet your financial expectations.
Nevertheless, irrespective of the reason you choose to invest in these stocks, it’s always a good idea to perform adequate research and understand the company you’re investing in.