What are non-cyclical stocks

Last Updated: 1 Jul 2022

The stock market is one of the most sought-after places for people to invest and earn good returns on their investments. As companies, after becoming public, have to list their shares on various stock exchanges, the share price is then determined by numerous market factors which prevail within the economy.

If the economic condition of a country is negative, its share market turns bearish, and the prices start to fall. Still, some investors make profits with their investments outperforming the market at the time of a bear market. They do it by investing in non-cyclical stocks.

What are Non-Cyclical Stocks?

The ups and downs of the economy do not sway non-cyclical stocks. They consistently outperform the market even when the economic growth is slow and continue to do so when the economy is growing positively. Non-cyclical stocks provide consistent yet steady profits to the investors as they produce products or services that fulfil the necessities such as water, gas, food and power.

These non-cyclical stocks are also called defensive stocks as they protect the investors against the negative effects of the economy, which may be going through a bear phase due to some uncontrollable external factors. Investors use non-cyclical stocks to diversify and ensure a steady stream of profits irrespective of the prevailing economic condition.

Although non-cyclical stocks significantly reduce the risk factor and the possibility of losses, they do not provide massive returns to the investors. As the demand for necessities is always constant, it is impossible for non-cyclical stocks to skyrocket in price. Hence, the main aim of investors for investing in non-cyclical stocks is safety and not to earn massive profits.

Understanding Non-Cyclical Stocks

The economy of a country is one of the main factors for the performance of the stock market. With less disposable income, the citizens tend to spend less on luxury or items which are not needed to fulfil necessities in life. The stocks of companies that make or sell discretionary items and services such as furniture, hotels, airlines, restaurants etc., are called cyclical stocks and are negatively affected if the economy is slow.

On the other hand, products or services that fulfil necessities in life never go out of demand. Even when the economic growth is slower, and citizens have less disposable income than before, they have no choice but to spend on items like food, power, water etc. Companies that make or sell such products or services see consistent demand irrespective of the economic situation. The stocks of such companies are known as non-cyclical stocks, and their price is not affected by economic factors. Since their demand remains constant, non-cyclical stocks are considered a safer investment than cyclical stocks that are highly volatile.

Advantages of Non-Cyclical Stocks

Here is why non-cyclical stocks are considered an ideal investment by professional stock market investors:

• Steady and Stable Returns: Non-cyclical stocks belong to companies that make and sell products and services that fulfil the necessities. It means that irrespective of the current economic situation, the demand for such companies will never lower and will only rise steadily with the population rise. The constant demand ensures that an investment made in non-cyclical stocks will rise in value over time without the possibility of incurring considerable losses.
• Less Volatile: Non-cyclical stocks remain unaffected by the factors that affect a country’s economy. It makes these stocks less volatile when compared to cyclical stocks that see their price fluctuate heavily. Since there is no volatility, investing in such stocks has a safer approach toward steady growth and earning constant returns on their investments.
• Diversification: Non-cyclical stocks are considered to be the best class of shares to diversify the portfolio and reduce the overall risk even if the economy is going through a slowdown. The investments allow for effective diversification and the potential for profit in every stock market situation.
• Dividends: Non-clinical stocks are defensive stocks that do not fluctuate in their price but provide regular dividends to the investors. As the companies having non-cyclical stocks are generally fundamentally strong, they distribute their profits as dividends, allowing investors to have an alternate stream of income. Furthermore, these stocks also rise in value over time, giving dual benefits of value and income.

Factors to Consider for Non-Cyclical Stocks

Although non-cyclical stocks are considered one of the safest investments, they still trade in a free market where investor sentiment also affects the outcomes. Because all the non-cyclical stocks are listed by the companies, they may lose value if the company suffers due to bad management or files for bankruptcy. Hence, it is vital to do solid research before choosing a company and its non-cyclical stocks for investment. You can do the research through:

• Technical Analysis: Technical analysis is the art of forecasting trading opportunities in stock by analysing statistical trends. It can give you an immediate short term target of where the price might go from the current levels.
• Fundamental Analysis: This measures a stock’s real worth or intrinsic value of stock in the share market. It is done by analysing the company’s past financial performance to predict its future growth.

After completing the technical and fundamental analysis, if you feel that the company is financially weak and has been showing unfavourable technical patterns, you should avoid investing in the company’s non-cyclical stocks. Conversely, you can choose to invest in the company and earn steady long-term profits.

Final Word

Almost every professional and experienced investor invests in non-cyclical stocks because of their ability to provide consistent returns that are unaffected by the economic situation. These stocks are considered to be the best option to diversify, earn regular dividends and reduce the possibility of huge losses to a minimum. However, non-cyclical stocks do not provide massive returns as they are less volatile than cyclical ones. Hence, non-cyclical stocks are invested in for safety rather than to earn hefty returns for the investors.

Frequently Asked Questions

What are the examples of non-cyclical stocks?

Non-cyclical stocks are basic necessity goods and services such as power, water, gas etc. For example, a company that generates electricity will have non-cyclical stocks.

What is a noncyclic good?

A noncyclic good is responsible for fulfilling the necessities of human beings, such as food, water, power etc., and does not fluctuate in demand even when there is an economic slowdown.

What is the difference between cyclical and non-cyclical stock?

Cyclical stocks are those that are affected by the economic condition and tend to fall in price if there is an economic slowdown. Non-cyclical stocks are those that outperform the market even when the economy is going through a bear phase.