What Are Non-Cyclical Stocks?

Last Updated on September 26, 2023 by BFSLTeam BFSLTeam

Introducing Non-Cyclical Stocks

We all want to invest in stocks that can do well in any economic situation, right? But what are these stocks called? How can we find them, and what makes them different from other stocks? 

What are Non-Cyclical Stocks?

Non-Cyclical stocks are stocks that perform better than their industry peers in the stock market regardless of the economic conditions. These stocks are often related to the daily needs of the common people and have high priority and importance for them. For example, food industry, LPG, Power, and a few more.

Another name for non-cyclical stocks is defensive stocks because they are defensive against economic instability. This is because they have high demand for goods and services that the consumers cannot give up. A classic example is toothpaste that the consumers buy regularly and cannot live without brushing their teeth for days. Stocks of such companies are usually in great interest of the investors due to continuous demand.

Utility companies are also a good example of non-cyclical stocks India; companies that provide resources such as power and gasoline or fuel are a great example of these. Utilities are essential services that ensure continuous demand and increase the share turnover over time.

How to Differentiate between Cyclical Stocks and Non-Cyclical Stocks?

Cyclical and Non-Cyclical stocks are related to how the share prices are affected by economic changes. However, there is a big difference between how cyclical and non-cyclical stocks impact the company and the investors and how they actually work.

• Cyclical stocks: are those that are directly affected by the economic cycles and depend on the business cycles. When the business is in high demand, usually when it is season-specific, the product value increases, which leads to more sales and higher share turnover; this is the best time to sell the stocks and book maximum profit. Similarly, when the business is in low demand, it is natural to get fewer sales and lower stock prices; this leads to lower share turnover and higher stock volatility and low liquidity. This is the best time to buy the stocks and then sell them during the high demand period when the stock prices are high.
• Non-Cyclical stocks: are different from cyclical business cycles. Here, there is no season-specific or period-specific demand that can raise or drop the stock prices. Instead, in non-cyclical stocks, the products and goods are demanded regularly. This is because the goods and services are related to the everyday needs of the common people, such as food, water, and other utilities.

Companies tend to make these regular goods as part of the everyday life of common people and then extend them to be luxury goods. When the prices are high, the consumer feels luxury due to direct competition with low budget products, the company’s book profit, and the stock prices increase. This also reduces the stock volatility and increases the liquidity factor.

Non-Cyclical stocks, though regularly in demand, do not face a major setback with economic instability. This sets them apart from cyclical stocks that can see a decline though the products are in demand, but the economic changes are not supporting the production and sales.

What to Consider before Investing in Non-Cyclical Stocks?

Non-Cyclical stocks are good for investment as they are in regular demand and can handle economic instability. However, one needs to do solid research about the company, understand the customer trust, and look for competitors.

Solid research is important before you invest in non-cyclical stocks; you can start by looking at different aspects such as growth performance, brand value, and expense ratio.

Also Read: Factors Affecting Share Prices

Advantages of Investing in Non-Cyclical Stocks

Non-cyclical stocks India are shares of companies that produce and sell essential goods and services that people always need, regardless of the economic situation. These stocks have many benefits for investors who want to grow their wealth steadily and safely. Here are some of the reasons why you should consider investing in non-cyclical stocks:

• Consistent and Reliable Returns: Non-cyclical stocks have a stable and constant demand that does not depend on the business cycle. This means that these stocks will always increase in value over time, as the population grows and the demand for necessities rises. Unlike cyclical stocks, which can suffer huge losses during recessions, non-cyclical stocks will ensure that your investment is always profitable.
• Low Volatility: Non-cyclical stocks are not affected by the factors that influence the economy, such as interest rates, inflation, consumer confidence, etc. This makes these stocks less prone to price fluctuations than cyclical stocks, which can vary widely depending on the economic conditions. By investing in non-cyclical stocks, you can avoid the risk of losing money due to market volatility and enjoy a smoother growth curve.
• Diversification: Non-cyclical stocks are a great way to diversify your portfolio and reduce your overall risk level. By adding non-cyclical stocks to your portfolio, you can balance out the effects of cyclical stocks, which may perform poorly during economic downturns. Non-cyclical stocks can provide you with positive returns in any market situation, making your portfolio more resilient and diversified.
• Dividends: Non-cyclical stocks are also known as defensive stocks, because they provide regular dividends to the investors. These dividends are a portion of the profits that the companies distribute to their shareholders, giving them an extra source of income. Moreover, these stocks also appreciate in value over time, giving you a double benefit of capital gain and income.

Also Read: Defensive Stocks

How to Choose Non-Cyclical Stocks

Although non-cyclical stocks are generally considered safe investments, they still trade in a free market where investor sentiment also plays a role. Therefore, it is important to do thorough research before selecting a company and its non-cyclical stocks for investment. You can do the research by using:

• Technical Analysis: Technical analysis is the technique of predicting trading opportunities in stock by studying statistical trends. It can help you identify the short term price movements and targets of the stock from its current levels.
• Fundamental Analysis: Fundamental analysis is the method of measuring the true value or intrinsic value of stock in the share market. It is done by analysing the company’s past financial performance to forecast its future growth potential.

After doing the technical and fundamental analysis, if you find that the company is financially weak or has negative technical patterns, you should avoid investing in its non-cyclical stocks. On the other hand, if you find that the company is financially strong and has positive technical patterns, you can invest in its non-cyclical stocks and reap long-term benefits.

Also Read: The Benefits of Investing in Stocks

Conclusion

Non-cyclical stocks are a popular choice among professional and experienced investors who want to enjoy consistent returns that are not affected by the economic situation. These stocks offer the benefits of diversification, regular dividends and minimal risk of huge losses. However, non-cyclical stocks do not offer massive returns as they are less volatile than cyclical ones. Therefore, non-cyclical stocks are more suitable for investors who prefer safety over high returns.