Table of Contents
What are Counter-Cyclical Stocks?
How Do Counter-Cyclical Stocks Work?
What are the Risks of Investing in Counter-Cyclical Stocks?
FAQs about Counter-Cyclical Stocks
You might have heard about Counter-Cyclical Stocks but know little about them, right? In simple terms, these are stocks that do better when the economy is not going great guns. You can picture them as a person who stays calm and composed even in the most stressful situations. At a time when other investment options struggle, you can expect these types of stocks to stay strong. You can add these to your investment portfolio as a strategic move to balance everything.
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What are Counter-Cyclical Stocks?
Counter-Cyclical Stocks are shares of all those companies that do better when the economy goes through a recession or a poor phase. During difficult economic times, investors can find these as a safety net for themselves. These are also referred to as defensive stocks or non-cyclical stocks.
On the other hand, in a booming economy these stocks might not show a similar strong performance. During these times, cyclical stocks hog the limelight.
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How Do Counter-Cyclical Stocks Work?
Counter-Cyclical Stocks ensure the stability of an investment portfolio in a down or tepid economy. During bad financial situations these types of stocks function as a shield when other stocks might struggle.
Cyclical stocks are diametrically opposite to Counter-Cyclical Stocks. These go up and down with the situation of the economy. When the overall financial market does great, these ride the wave of growth.
Counter-Cyclical Stocks are associated to particular industries, such as those involved with the basic necessities of human beings. These are about the things that are always in demand among humans – such as health care items, utilities and grocery items. Even in tight financial situations, these things are always purchased by the public which ensures that money keeps flowing on for the companies that bring out these products.
For example, in a recession-like situation, the public might generally like to reduce extra expenses – such as going for fancy stuff or eating out. However, they do not stop getting medicines, paying for power or buying grocery items. Companies that sell these essential commodities go on making money. This is exactly the reason why such companies continue to find their stocks in demand even in a down economy.
However, it is important to remember that not all stocks in such industries go by this pattern. The way that these stocks perform in the market can also get impacted by changes in buying habits of people, emergence of new technologies or imposition of new government rules.
Also, there are times when Counter-Cyclical Stocks may perform poorly in a booming economy and fewer people are in need of the services or goods offered by the companies that offer these shares.
What are the Risks of Investing in Counter-Cyclical Stocks?
Making investments in Counter-Cyclical Stocks make an investment portfolio stable during economic recession. However, there also various risks associated with such kinds of investments. Such risks include:
Fluctuations in the market
The unpredictable nature of the stock market has a major impact on Counter-Cyclical Stocks. For example, in a recession-like situation, even the countercyclical industries considered to be most stable can suffer from a drop in demand – whether it comes to services or products.
Great dependency on government rules and policies
Countercyclical sectors such as utilities and healthcare heavily depend on government policies for their performance in the market.
Naturally, any changes made to such policies have a direct impact on the performance of these industries. The impact can be noticed visibly on the performance of the industries where these companies operate.
Company-specific risk
Not every company in the counter cyclical industry shows excellent performance during challenging economic situations. It is important to carry out fundamental analysis and thorough research in order to effectively identify companies having robust historical performance and financials.
FAQs about Counter-Cyclical Stocks
Here are the answers to some questions asked commonly about Counter-Cyclical Stocks:
1. Why Counter-Cyclical Stocks so good performance even in challenging economic situations?
Counter-Cyclical Stocks belong to the companies that deal in important services and goods that people need always. These are always in demand and even in those tough economic situations when people generally like to cut back on unnecessary expenses.
These items are not seen to be unnecessary and are generally regarded as indispensable for daily lives and activities. There is a sustained demand for these products and services which help maintain the value of these stocks.
2. Is it possible for Counter-Cyclical Stocks to show poor performance during expanding economic situations?
It is quite possible for some Counter-Cyclical Stocks to show struggling performance even in a booming economy. This is because when there is more disposable income in hand people might not feel as in client to go for these services or products.
3. Do all Counter-Cyclical Stocks show consistent performance during challenging economic situations?
That is not necessarily the case. Several factors such as changes in consumer behavior, advancements in technology and alterations in government regulations can have a direct impact on the performance of individual stocks in the countercyclical industry.
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4. Which Counter-Cyclical Stocks are safer to invest on?
It is important for you to carry out through research in order to find this out. Generally, it is better to invest on the Counter-Cyclical Stocks of all those companies that have historically showed strong performance in the stock market even during downtowns.
You can find these to be a safer bet for investment. A little time and research can go a long way to ensure a safe investment portfolio.
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Conclusion
It is important that you conduct some homework before purchasing Counter-Cyclical Stocks. You should check out the financial performance of the company, take a look at the things happening in the industry and consider the economic and political situation as well.
With this kind of research, it can be easier for you to choose the best Counter-Cyclical Stocks for your own investment portfolio. Even in tough economic and market situations, you can get an opportunity to make good money.
