Difference betweeb speculative, defencive and cyclical stock
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When the economy is in a recession the profits of a Cyclical company tend to drop and so its share price. ... A Defensive (or non Cyclical) stock is a stock whose profit growth and therefore its price has a very low correlation to the economic activity.
Cyclical vs. Defensive stock
First, let’s start by defining the concepts of cyclicality and defensiveness. A Cyclical stock is a stock highly correlated to the economic activity. When the economy is in a recession the profits of a Cyclical company tend to drop and so its share price. Conversely, when the economy is in a good shape (expansion), the share price tends to goes up with the profit growth. The best example is the automobile sector. Indeed an individual is not willing to buy a new car when his income lowers, which drags car manufacturers’ revenues down. On the contrary, he will be more tempted to treat himself with a new car if his economic situation is improving. Another example would be IT firms. A company is more reluctant to invest in renewing its computer system if it is in the middle of an economic turmoil and facing a declining activity. This expenditure will certainly be postponed until the recovery.
A Defensive (or non Cyclical) stock is a stock whose profit growth and therefore its price has a very low correlation to the economic activity. No matter how the economy is doing, the revenues, the earnings and the cash flows of the company remain relatively stable and so the share price. Health care, household and Personal Care (HPC) stocks are known as Defensive. Indeed, even though an individual has decreasing revenues, he will not significantly reduce his soap or toothpaste spending.
Cyclical vs. Defensive stock
First, let’s start by defining the concepts of cyclicality and defensiveness. A Cyclical stock is a stock highly correlated to the economic activity. When the economy is in a recession the profits of a Cyclical company tend to drop and so its share price. Conversely, when the economy is in a good shape (expansion), the share price tends to goes up with the profit growth. The best example is the automobile sector. Indeed an individual is not willing to buy a new car when his income lowers, which drags car manufacturers’ revenues down. On the contrary, he will be more tempted to treat himself with a new car if his economic situation is improving. Another example would be IT firms. A company is more reluctant to invest in renewing its computer system if it is in the middle of an economic turmoil and facing a declining activity. This expenditure will certainly be postponed until the recovery.
A Defensive (or non Cyclical) stock is a stock whose profit growth and therefore its price has a very low correlation to the economic activity. No matter how the economy is doing, the revenues, the earnings and the cash flows of the company remain relatively stable and so the share price. Health care, household and Personal Care (HPC) stocks are known as Defensive. Indeed, even though an individual has decreasing revenues, he will not significantly reduce his soap or toothpaste spending.
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