It's been said that nothing is certain except for death and taxes, but there are likely many people who feel that the fluctuations of the stock market should be added to the list. It is nearly impossible to find a stock or other investment that doesn't fall in value at one point or another while you own it… some even make a regular habit of it.
In order to get the most out of your investment experience, it's important to recognize patterns in the performance of certain stocks so that you can get a better feel for how long their occasional fluctuations might last and help you to decide whether or not you should sell the stock or see it through until prices rise again.
Defining Cyclical Stocks
Cyclical stocks, as the name might imply, are stocks that periodically fall in value and then rise again soon after. The apparent cycle of gain and loss can be caused by several different situations, from economic trends and seasonal products to the stocks being issued by companies that do the majority of their business during certain parts of the year such as holidays or tax preparation season. In most cases these stocks don't suffer a major loss over the course of the cycle, due largely to the recovery that occurs later in the cycle.
Some cyclical stocks perform these actions in reverse, as well… instead of falling in value, they increase the value of their shares for a time and then the prices return to their normal state.
The Fluctuations of Cyclical Stocks
Of course, the fluctuations of cyclical stocks tend to make some investors shy away from making a major commitment to what tend to be at best a form of seasonal investment. Individuals who are looking for good short-term investments often consider these fluctuations to be more of a godsend, however, and are much more willing to invest larger sums during the low point of the cycle in hopes of reaping greater rewards when the value of the stock shares peaks. Of course, this plan isn't foolproof… changes in the market or the economy can either stimulate or delay the cycle, making the cycle start later or last longer.
Additionally, some cyclical stocks are only temporarily in a cycle so investing in them with the hopes of their repeating of past performance can cause problems with cycle planning when they begin either rising or dropping in value and then fail to recover or if they fail to do either.
Deciding Whether to Keep or Sell Cyclical Stocks
Of course, cyclical stocks can cause undue stress when their value begins to fall… the decision must be made to either hold onto the stocks until the value recovers or sell off at least some of the shares of stock in order to avoid a potentially large loss of investment revenue.
The decision remains up to the investor, but a well-diversified portfolio that contains investments in cyclical stocks should be able to bear temporary losses in stock value without a great degree of difficulty since if the stock is truly cyclical it will recover within a reasonable amount of time anyway.
Cyclical Stocks and Long-Term Investments
Of course, cyclical stocks can be used effectively for long-term investments. The growth end of the cycle is usually increased slightly with each revolution of the cycle, so investors who choose to purchase cyclical stocks and hold onto them for a number of years may find that when they finally sell them the value is much higher than it would have been for short-term investments.
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