Finance Definitions: Cyclical Industry Investing

Finance Definitions: Cyclical Industry Investing

When beginning to invest, terms like Cyclical Industry Investing can be a little off-putting to the unseasoned investor. However, the big term is not actually as difficult to understand as it may seem at first glance. Let’s take a look a little more closely at cyclical industry investing.

What is a Cyclical Industry?

In its most basic form, a cyclical industry is one that typically experiences large gains during a good economy and large losses during a recession. When you think about it in these terms, a cyclical industry is one in which many Americans will purchase a product when they have a little extra cash lining their pockets. In other words, these are some of the products and services that we may consider luxuries.

For example, sales of cars, boats, airline tickets, and homes generally decline during a recession. People often wait to purchase these products and services until the economy is on more solid ground. Additionally, many people suffer financially during recessions, and they may decide to wait on these types of purchases until they have more expendable cash.

When Should I Invest in Cyclical Industries?

At the tail end of a recession, many people like to purchase stock in cyclical industries like airlines, automobile companies, boat manufacturers, and construction companies. When the economy rebounds, those who purchased these stocks low can often appreciate large gains when others begin to purchase these luxuries once again.

The trick to purchasing cyclical industry stocks, though, lies in the timing. You must know when to buy at the lowest and when to sell at the highest to make your optimal gains. Additionally, like any other stock, an investor should always know the strength of the company in which they wish to invest. Buying cyclical industry stocks can be problematic if the company is not strong enough to weather a recession, so your research really pays off when deciding on the best cyclical industry bang for your buck.

What Else Should I Know?

In addition to doing your research and timing it right, there’s one more thing to think about when purchasing cyclical industry stocks. Since these industries rely so heavily on the economic health, buying and holding can be a problem. As we’ve seen recently (and continue to see), recessions can take years to turn around. Economist’s projections can be faulty; you may think the recession is close to over based on news reports, but a second dip into the recession could be on the horizon. Basically, if you buy a cyclical industry stock when the recession seems to be over, you could be holding onto it for many years before you see any return.

So there you have it: cyclical industry investing. Researching a company and timing the purchase right could bring you excellent returns, but you might need to make sure that the economic rebound is truly on the horizon before you make that purchase.

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LaTisha @YoungAdultFinances's picture

LaTisha @YoungAdultFinances wrote:

Mon, 11/21/2011 - 15:06 Comment #: 1

I've been getting into a stock that should benefit from low valuations in real estate right now. It's probably a risky play but I am confident that global valuations will come back in line within the next few years.

MoneyCone's picture

MoneyCone wrote:

Mon, 11/21/2011 - 16:10 Comment #: 2

One good example of when timing actually works!

Christa Palm's picture

Christa Palm wrote:

Mon, 11/28/2011 - 18:28 Comment #: 3

LaTisha, I hope your stock purchase plays out well for you. Hopefully stocks and the economy rebound soon.

MoneyCone, isn't timing amazing?