Investors need to consider various factors when making decisions about their investments. However, two of the most critical factors among these include the risks and rewards investors can get. These factors often take priority over others. Risks and rewards usually have a direct relationship with each other. The higher the risks that investors take, the higher the rewards will be. While investors would always prefer maximum returns, they may not be willing to maximize their risks. Therefore, investors usually use investment strategies to strike a balance between both of these. On top of that, investors also need to diversify their risks to ensure they don’t suffer from high unsystematic risks. For that, investors will need to use investment strategies, one of which is dynamic asset allocation. What is Dynamic Asset Allocation?Dynamic asset allocation is an investment strategy that comes from the asset allocation strategy. Using asset allocation, investors divide their portfolio into several asset classes, including equities, debts, cash, commodities, etc. Usually, they use a fixed proportion for each asset class within their portfolio. However, dynamic asset allocation does not rely on fixed proportions. Instead, dynamic asset allocation uses frequent adjustments to alter the mix of these asset classes. The primary factor in deciding the mix using this strategy is a specific asset class's performance in the market. When an asset class performs well, dynamic asset allocation focuses on adjusting the portfolio mix to include more assets from that class. How does Dynamic Asset Allocation work?Dynamic asset allocation works similarly to the asset allocation strategy. Investors divide their portfolios into several asset classes to diversify against unsystematic risk. However, by doing so, investors may lose potential rewards from asset classes that perform well. Therefore, dynamic asset allocation takes that point into consideration. Dynamic asset allocation also involves dividing an investor's portfolio into several asset classes. However, when a specific class performs well in the market, this strategy adjusts the portfolio to include more assets from that class. Once the market settles down, dynamic asset allocation identifies any changes in the market. Then it helps investors readjust their portfolio accordingly. Dynamic asset allocation does not use the standard static approach used by asset allocation. For that reason, it allows investors to react to the changing risks in the market. However, it does come with an additional cost of requiring active management. Unlike asset allocation, investors need to survey the market and measure risks continuously. According to that review, they must react to any changes in risks and rewards. What are the advantages and disadvantages of Dynamic Asset Allocation?With dynamic asset allocation, investors can get several advantages. Most importantly, it allows investors to adjust their portfolios according to fluctuations in risk. This way, they can minimize their risks while also maximizing their returns. This approach takes a reactive approach to market risks, which can allow investors to avoid substantial losses. However, dynamic asset allocation comes with some additional costs. As mentioned, the most important of these is the time and resources required to manage portfolios actively. Since it does not take a passive approach to investing, it may be more costly. Similarly, investors changing their portfolio mix constantly also have to suffer from the related transaction costs. ConclusionDynamic asset allocation takes an active approach to managing portfolios. It is based on asset allocation in which investors divide their portfolios into several asset classes. Unlike asset allocation, however, dynamic asset allocation is not static. It also involves dividing portfolios into several asset classes. However, it also requires investors to alter the portfolio mix based on risk fluctuations in the market. Article Source Here: What is Dynamic Asset Allocation?
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Pension funds refer to investment pools that include funds for retirees. These funds primarily come from an employee who saves for their future. In some cases, employers may also contribute on the employee's behalf. A fund manager then manages these funds and invests them to achieve a specific goal. During this process, the pension funds will face various risks. One of these risks includes longevity risk. What is Longevity Risk in Pension Funds?Pension funds face longevity risk for all pensioners. Usually, each pension fund estimates the life expectancies of the pensioners. Based on that estimation, they make decisions. Longevity risk is when the life expectancies of the pensioners exceed the predicted rates by the pension funds. In other words, when retirees live longer than estimated, it constitutes a longevity risk. Longevity risk in pension funds can be significantly detrimental to the funds. It can lead to increased costs in the form of higher pension payments. When the life expectancy of pensioners is low, the longevity risk will also be low. However, once this expectancy grows, the longevity risk in pension funds also increases. The number of retirees reaching retirement age also contributes to this risk. However, higher mortality rates can decrease this risk. How does Longevity Risk in Pension Funds work?Pension funds may have hundreds of pensioners or policyholders. Usually, the higher this number is, the higher the future costs for the pension funds will be. Similarly, employees reaching retirement age will also contribute to the pension funds costs. The longer retirees collect pension payments, the more these funds have to pay them. Pension funds usually forecast the costs associated with these payments. For that, these funds consider various factors, one of which is the pensioners’ life expectancy. The longer pensioners live past their retirement age, the higher the costs for the pension funds will be. Therefore, longevity risk is when pensioners’ life expectancy exceeds the expected rate by the pension funds. As mentioned, pension funds seek to forecast their payments to pensioners. However, when the life expectancy rate exceeds the predicted amount, the payout levels for pension funds will increase. But there are also other factors that may impact the longevity risk for pension funds. One of these includes the type of pension funds. Usually, defined-benefit pension funds have the maximum exposure to longevity risk. How can Pension Funds manage Longevity Risk?Longevity risk can be detrimental to pension funds. As mentioned, these risks can significantly increase the payout level, which results in added costs. However, pension funds can still manage longevity risk. The most common technique used by pension funds to do so is to transfer the risk. Usually, pension funds use various instruments to manage this risk. These instruments may include longevity swap transactions or annuities. Pension funds can also use reinsurance as a way to mitigate longevity risk. However, transferring these risks will also come with additional costs. While pension funds can predict life expectancy rates, it is not possible to get accurate predictions. Therefore, these funds must consider whether it would be feasible to transfer these risks. ConclusionPension funds face various risks, including longevity risk. These funds usually estimate their payout costs based on several factors. Among these, a critical factor includes pensioners' life expectancy rates. If these rates exceed the expected level, the longevity risk in pension funds will be high. However, pensions funds can still manage these risks in various ways. Originally Published Here: Longevity Risk in Pension Funds When investing, every investor has an objective in mind. Usually, this objective differs for each investor based on several factors. These factors may include an investor's time horizon, funds available, risk tolerance, etc. Based on each investor’s objective, the investment strategy will differ. One of the strategies that investors can use for this purpose is a goals-based investing strategy. What is Goals-Based Investing?Goals-based investing (GBI) is a term used to describe an investment strategy that relates to investors' objectives. As mentioned, each investor will have different investing goals, and, therefore, this strategy will vary accordingly. Investors can link their income and investments with an objective that will seek to streamline their investing strategy. Investors can use goals-based investing to achieve their life or financial goals. They can also hire a wealth manager to take care of their investments based on the defined objectives. With this investing strategy, investors do not usually focus on wealth maximization unless that is their goal. Instead, GBI works towards achieving the specific goals or objectives that investors have. How does Goals-Based Investing work?Goals-based investing does not work similarly to other investing strategies. As mentioned, most other investing strategies focus on maximizing the investor's wealth. Instead, GBI seeks to meet a defined goal. In most circumstances, this goal will be a personal or financial goal that investors seek to achieve. Therefore, most techniques used in other investment strategies may not apply to GBI. With goals-based investing, the benchmark for success also differs. This benchmark tracks how well the investor or manager achieves the objectives for the investment. GBI also allows investors to pursue several goals. On top of that, it can help investors rank or prioritize specific objectives over others. For example, goals-based investing may be a feasible option for parents who want to put their kids through college. How can investors use Goal-Based Investing?There are several steps involved in using goal-based investing for investment needs. The first step during the process is for investors to establish the funds needed for the objective. Similarly, they need to determine the time frame for the goal. These goals can be short-, medium- or long-term. Based on both these factors, investors can establish their investment requirements. Once investors establish the timeframe and fund requirements, they must estimate the present cost. As mentioned, investors should have an idea of this cost based on their calculations. However, they will also need to adjust it for any expected changes, such as inflation. Once they do so, investors must also measure their future costs. This process may require them to speculate or predict future outcomes. All of these steps need to be accurate to provide the best results. Based on all this information, investors can start investing through a goal-based investing strategy. Investors can then start making contributions to their plan through their income or savings. Similarly, they will need to choose the right investments that can help them achieve their goals. Practically, it may require investors to choose various investments to reach their objectives. ConclusionFor most investors, the primary goal of investing is wealth maximization. However, some investors may also have other objectives in mind. For that, they can use a goal-based investing strategy. GBI is an investment strategy that focuses on achieving investors’ goals. There are several steps involved in ensuring this strategy provides the maximum benefits for users. Article Source Here: Goals-Based Investing An investment strategy includes a set of rules or principles that investors use to achieve their goals. Usually, investors have investment strategies for their portfolios to help them maximize returns while also minimizing risks. There are several factors that an investment strategy may consider. These include the investor’s goals, risk tolerance, time horizon, etc. There are several investment strategies from which investors can choose. These strategies don’t relate to individual investors only. It may also be beneficial to institutional investors, such as pension funds, mutual funds, etc. One common investment strategy used by pension funds is liability-driven investing or liability-driven investing. What is Liability Driven Investing?The term liability-driven investing (LDI) refers to an investment strategy. With this investment strategy, investors try to obtain enough assets to cover all their liabilities, whether current or future. As mentioned, a liability-driven investing strategy is most common in pension plans, specifically defined-benefit schemes. With these plans, the liabilities can significantly increase over time. Therefore, having enough assets to cover those liabilities is crucial. Investors using the liability-driven investing strategy must estimate their current and future liabilities. Once they do so, they can work towards obtaining assets that can cover all those liabilities. For that, investors need to use asset management and allocation techniques. LDI is beneficial when investors don't want to focus on beating a benchmark. Instead, it helps them improve their portfolios, which in this case will be the pension plan. Why do investors use Liability Driven Investing?The liability-driven investment focuses on stabilizing the underlying plans. Therefore, it seeks to minimize the risks and uncertainty associated with it. With defined-benefit plans, the benefits are predetermined. Therefore, investors can easily predict their current and future liabilities. However, the uncertainty comes with the contributions made to the plan. With liability-driven investing, investors can focus on reducing the unpredictability of contributions made to the plan. It also seeks to minimize the impact of market fluctuations that cause uncertainty. For that, investors will need to match the interest rate sensitivity of a plan’s assets to its liabilities. Overall, investors can reduce the volatility of future contributions to a defined-benefit plan using the LDI strategy. For individual investors, the liability-driven investing strategy can also be beneficial. For example, pensioners can use this approach to estimate their total income requirements for the future. They can then deduct any expected income in the future from this amount. The residual value will constitute their liabilities for the liability-driven investing strategy. Pensioners can then make investments to generate returns that meet these liabilities. What is an example of Liability Driven Investing?A retiree estimates they will need $15,000 annual income to meet their basic needs. However, they also expect to receive $10,000 from multiple sources, including Social Security and pension income. Nonetheless, it still leaves $5,000, which they must fulfill from other sources. Using LDI, the retiree needs to invest in an asset that will provide at least $5,000 annual income. ConclusionLiability-driven investing is an investment strategy through which investors can focus on collecting assets to meet their liabilities. This strategy is most common for defined-benefit plans. However, it is also beneficial for individual investors. Liability-driven investing can help investors minimize their risks and focus on reducing unpredictability. Post Source Here: Liability Driven Investing (LDI) The P/E ratio is one of the most critical ratios for investors. It represents the ratio between a stock's price and the underlying company's earnings per share. This way, it helps investors can make decisions about their investments. However, the traditional P/E ratio may not provide information about a company's historical performance. For that, investors may use the cyclically-adjusted P/E ratio. What is the Cyclically Adjusted P/E Ratio?The cyclically-adjusted P/E (CAPE) ratio represents the ratio between a company’s stock price and its average earnings for the last ten years. Investors have to adjust these earnings for inflation before using them in the CAPE ratio. Therefore, it measures a company's real earnings per share over a given 10-year period. Using these earnings, investors can adjust for any fluctuations in financial performance caused by a nation's business cycle. Other names used for the cyclically-adjusted P/E ratio include the Shiller Ratio and the PE 10 Ratio. The CAPE ratio can help investors gauge a company’s financial performance over several periods barring business cycle impacts. Therefore, it accounts for any fluctuations in a company’s profits due to economic expansions or recessions. Using this information, investors can ultimately decide whether a stock is undervalued or overvalued. How to calculate the Cyclically Adjusted P/E Ratio?As mentioned, the cyclically-adjusted P/E ratio is the ratio between a company’s stock price and real earnings for ten years. Therefore, the formula for the CAPE ratio is as below. CAPE Ratio = Company’s stock price /Average earnings for ten years adjusted for inflation A company's stock price is usually available through the stock market. For private companies, however, it may be challenging to calculate it. On the other hand, the average 10-year real earnings may also require investors to perform some analysis. Once done, however, it should allow smooth out the impact of business cycles on a company's financial performance. How can investors use the Cyclically Adjusted P/E Ratio?Investors can use the cyclically adjusted P/E ratio to measure a company's performance over a long period. Usually, the P/E ratio considers current or short-term results. Therefore, it may not be an indicator of a company's long-term performance. The cyclically adjusted P/E ratio solves that issue by considering the company's earnings for ten years. However, it also adjusts for any inflation during the period to account for business cycle impacts. Investors can also use the CAPE ratio to forecast a company's future earnings. However, they shouldn't use this tool on its own. Overall, the CAPE ratio can allow investors to identify stocks that are undervalued or overvalued. When the calculated CAPE ratio for a company is significantly high, it may indicate its stocks are overvalued. On the other hand, low CAPE ratios indicate undervalued stocks. Cyclically adjusted P/E ratios also play a significant role in identifying market bubbles. In this case, the P/E ratio may not be helpful. However, by calculating the ratio between a stock's price and its 10-year earnings, investors can get better results. A criticism of the CAPE ratio may include not adjusting for changes in accounting policies or standards. Investors should be aware of it when using the ratio. ConclusionThe P/E ratio is one of the investors' favourite ratios to use when analyzing various stocks. However, it may not provide accurate information about a company's historical performance. For that, investors may use the cyclically-adjusted ratio. This ratio considers a company's stock price in relation to its earnings for ten years adjusted for inflation. Article Source Here: Cyclically Adjusted P/E Ratio (CAPE) Inflation is an increase in the price of goods and services in a nation over time. It also represents the decrease in the purchasing power of a nation's currency. Inflation can have a positive impact on economic activity. However, there are some cases in which it can also be detrimental. There are several causes of inflation. One of these may include government spending, which influences aggregate demand. What is Government Spending?Government spending represents any money the government spends on acquiring goods and services. The government, in this case, refers to the public sector as a whole. Therefore, government spending includes any money spent on healthcare, justice, education, etc. It constitutes a critical aspect of a nation's fiscal policy used to support its economic goals. There are several factors that governments will try to target with government spending. However, this spending is crucial in keeping a nation's economy active. It is also a part of a government's policy to use spending to shape the economy. Usually, governments use taxpayer payments to fund these policies. In some cases, however, they may also obtain loans for spending. How does Government Spending work?Every government has policies to support future economic growth or stability. For that reason, governments will invest in various fields. Government spending can be a critical economic policy tool that governments can use to fulfill that purpose. As mentioned, it is a part of a nation's fiscal policy, which is a combination of government spending and tax policies. Governments can use government spending in one of two ways. The first includes increasing government spending while decreasing taxes. It is a part of a nation’s expansionary fiscal policy, which governments can use to stimulate the economy during recessions. It may also include decreasing government spending and increasing taxes. These are a part of a nation’s contractionary fiscal policy. This policy is beneficial in cooling the economy down during economic booms. Does Government Spending cause inflation?As mentioned, governments may use fiscal policy in one of two ways. During expansionary fiscal policy, governments use government spending to stimulate economic growth. Governments usually spend on acquiring goods and services. By doing so, governments can increase the aggregate demand in the economy. This policy also causes the prices of goods and services in an economy to grow, known as inflation. The formula for aggregate demand also considers government spending on public goods and services. Therefore, it plays a significant role in influencing the demand in a nation. As mentioned, during expansionary fiscal policies, government spending increases. This increase can then lead to inflation. For contractionary fiscal policies, the opposite may apply. However, the above connection between government spending and inflation is theoretical. In practical situations, there is no established direct connection between the two. In some cases, an increase in a nation’s government spending has adversely influenced inflation. On top of that, there are several other factors that may play a role in determining the impact of government spending on inflation. One of these includes the source of government spending. ConclusionGovernment spending refers to the money governments spend on acquiring public goods and services. There are several ways in which governments can fund it. Governments can use government spending during the expansionary fiscal policy to increase aggregate demand. It, in turn, may cause inflation in an economy. Practically, however, there is no established direct connection between inflation and government spending. Post Source Here: Does Government Spending Cause Inflation? Investors face various risks when investing in the stock market. Some of these risks may be inherent to the stock in which they invest. Others may apply to the stock market as a whole or even the economy. These risks can significantly impact the returns they can get. While stock-specific risks are diversifiable, investors can't do the same for stocks that suffer due to market or economic risks. Investors can, however, invest in defensive stocks. What are Defensive Stocks?As mentioned, some stocks take a hit due to the market or economic conditions that apply to stock markets. Defensive stocks are shares of companies whose performance does not suffer due to these conditions. In other words, defensive stocks include stocks that demonstrate stable performance in any economic or market condition. Another name used for defensive stocks is non-cyclical stocks, which is the opposite of cyclical stocks. Cyclical stocks suffer due to changes in a nation’s economic activity. However, non-cyclical stocks usually illustrate minimum or no reaction to fluctuations in economic conditions. Due to this feature, defensive stocks provide stable returns or dividends. How do Defensive Stocks work?When the economic conditions in a nation change, the stock market also flourishes or takes a hit. During economic booms, stocks show positive movements. In contrast, recessions can cause adverse fluctuations. Nonetheless, any movements can be critical for investors. While they can provide high rewards, these also carry substantial risks. When investors cannot predict a nation's economic conditions, they may choose to invest in defensive stocks. These stocks usually come from companies or sectors that provide essential items. Since consumers are likely to continue consuming these items, these stocks rarely suffer. Therefore, regardless of the economic conditions in a nation, these companies perform stably. What are the advantages and disadvantages of Defensive Stocks?Defensive stocks have various advantages and disadvantages for investors. The most critical of its benefits include the stability it brings to an investor's portfolio. This stability comes due to the lower risks that defensive stocks carry. For risk-averse investors, these stocks can be attractive. During periods of economic decline, defensive stocks can outperform the market. They also provide stable dividends, which investors prefer in uncertain conditions. However, when it comes to economic expansions, defensive stocks show below-average performance. Due to how stable these stocks are, they carry lower growth. On top of that, they offer significantly lower capital gains. During economic booms, consumers may also prefer consuming luxury items. This preference can impact how these companies perform. Therefore, defensive stocks may underperform during economic booms. How can investors identify Defensive Stocks?Identifying defensive stocks may require investors to analyze various stocks and consider several factors. There are several characteristics that defensive stocks demonstrate. Usually, investors can identify these stocks by obtaining and analyzing historical data. Usually, companies that have a stable history offer defensive stocks to investors. On top of that, most well-established companies provide defensive stocks. Companies that offer growing or constant dividends are stable. Therefore, investors can invest in these to obtain defensive stocks. Furthermore, investors can analyze a stock's beta coefficient to identify these stocks. A low beta coefficient carries lower risks and, therefore, can provide defensive stocks. ConclusionDefensive stocks represent stocks that don’t suffer due to fluctuations in economic conditions. These stocks usually come from companies that offer essential products or services. Defensive stocks come with various advantages, which primarily include lower risks. However, they can also have drawbacks. There are several factors that investors consider when identifying defensive stocks. Article Source Here: What are Defensive Stocks? The volatility risk premium is a common phenomenon that exists in the volatility space. It is often defined as a stock’s or index’s implied volatility (IV) minus its realized volatility (RV). For equity indices, over the long term IV is generally greater than RV, thus giving rise to the popularity of short volatility trading strategies. Despite its frequent use, it appears, however, that there exists no reliable method for forecasting the volatility risk premium. In the literature, we have seen methods ranging from a simple one such as IV-HV (historical volatility) to a more sophisticated method such as GARCH. A recent article [1] examines the volatility risk premium through implied volatilities and the correlation of sector ETFs. It concludes, surprisingly, that correlation premium is a good predictor of the volatility risk premium, We posit that abnormalities in the short-term pricing of an index option can be better detected by studying the implied correlation than the implied volatility. A high index volatility premium may be attributed to rationally-expected high stock implied volatilities. In this case, the correlation premium, defined analogously to the volatility premium as current implied correlation less recent realized correlation, would not necessarily be high because implied correlation is calculated using stock implied volatilities as inputs and therefore controls for their levels. On the other hand, an abnormally high correlation premium can signal either rationally-expected high correlations or some temporary deviation in the index implied volatility. We demonstrate that it is often the latter and that a measure of abnormal correlation premium is more predictive of future changes in sector implied volatility than is the volatility premium. Building on this finding, we also show that trading signals concerning sector option implied volatilities based on the abnormal correlation premium are profitable in absolute terms, and also more profitable than conventional strategies based on the volatility premium Using the abnormal correlation premium to generate signals, the authors manage to develop profitable options trading strategies. These strategies are delta- and vega-neutral. References [1] Koticha, Apoorva and Li, Chen and Marks, Joseph M., Abnormal Sector Option Correlation Premiums and Predictable Changes in Implied Volatility (2021). https://ssrn.com/abstract=3862777 Post Source Here: Predicting Volatility Risk Premium Through Sector Implied Correlation The increase in the inflation-adjusted market value of goods and services produced in a nation over a specific time is known as economic growth. Gross Domestic Product (GDP) is the measure of a nation’s economic growth over time. This growth may occur due to several economic factors which stimulate the economy. One of these includes consumer spending. What is Consumer Spending?Consumer spending is a term in economics that represents the total money spent by consumers on final goods and services. However, this spending should be on consumed products. Therefore, the spender must consume the items for it to count as consumer spending. Consumer spending may arise due to spending on everyday products or services. When someone uses a product or service which they pay for, it counts as a consumer. There are several metrics that measure consumer spending in an economy. These measure consumers' decisions of the products or services they want to buy, how much they buy, when they buy it, etc. Consumer spending has a significant impact on a nation’s economic growth. Before understanding its impact, it is crucial to look at how analysts measure a country’s economic growth. How is Economic Growth measured?Economic growth represents the increase in the market value of goods and services produced by an economy over time. As mentioned above, a country’s GDP measures its economic growth. There are several factors that play a role in determining a nation’s GDP. The formula to calculate GDP is as below. Gross Domestic Product = C + G + I + (X - M) In the above formula, C represents 'Consumption', 'G' is Government Spending, and 'I' signifies investments. 'X' and 'M' are a country's total exports and imports. It is also possible to use a nation's net exports instead of these. Net exports represent the residual amount after subtracting a nation's total exports from its total imports. How does Consumer Spending stimulate Economic Growth?From the above formula, it is clear that consumer spending or consumption plays a significant role in economic growth. It is one of the primary metrics involved in calculating economic growth through GDP. In most nations, it is one of the most critical determinants of economic growth. It can affect both the demand and supply for finished goods and services in a specific economy. According to the Keynesian Economic Theory, consumer spending is the most important determinant of economic performance. It constitutes a significant portion of the gross domestic product. When it comes to the supply and demand in an economy, consumer spending can impact demand substantially. The more consumers are willing to spend, the higher the demand will be. Catering to the progressing demands, most manufacturers will also raise their supplies. It is also crucial for businesses. More consumer spending means higher product and services sales. Consumer spending is what initiates the most economic activity. Due to this, it also drives production, which is often the primary reason why businesses produce goods and services. ConclusionEconomic growth refers to the increase in the market value of goods and services produced in a nation during a specific time. Consumer spending represents the total money spent by consumers on final goods and services. Overall, it can play a significant role in economic growth and the calculation of GDP. Consumer spending determines the demand in a nation, which contributes to economic growth. Article Source Here: How Does Consumer Spending Stimulate Economic Growth? A country’s economy dictates the prices of products and services within it. For investors, keeping an eye out for any economic indicators that affect investment prices is crucial. Specifically for stocks, any changes in a nation’s economic activity can be highly detrimental. It can introduce volatility to stock prices, which is rarely good for investors. In some cases, however, stock prices may not get affected by any economic changes. Overall, stocks are highly vulnerable to economic changes, except for some cases. Investors need to identify any stocks that fluctuate with fluctuations in economic activity. For that reason, they will need to consider investing in cyclical stocks. What are Cyclical Stocks?Cyclical stocks include the shares of a company that follows a nation’s economic cycle. These stocks perform well during economic expansions but take a hit during recessions. In short, the underlying company that cyclical stocks come from closely relates to the nation’s business cycle. It is because these companies sell products or services that have high-volume sales during expansion. Cyclical stocks follow the same cycles that a nation's economy experiences. Therefore, these stocks exemplify all the characteristics that investors can expect from a particular economic cycle. The products offered are discretionary items that flourish during booming economic periods. These companies expand during good economic times. However, they also suffer during adverse economic conditions. How do Cyclical Stocks work?Cyclical stocks relate to companies that get affected by fluctuations in economic activity. This effect usually comes due to the products or services that these companies offer. During expansions, consumers spend more and, therefore, these companies make higher sales and profits. On the other hand, they suffer from lower sales and losses during economic recessions. The underlying company also adapts due to the fluctuations in economic activity. During economic expansions, these companies invest in assets and growth. However, during recessions, they abstain from doing so. These actions then affect the company’s stock prices in the market. Therefore, these stocks are known as cyclical stocks. How do Cyclical Stocks impact investors?For investors, it is crucial to identify cyclical stocks. It is because they can generate high returns on these stocks by following a nation’s economy. Investors can buy stocks during economic downfalls and sell them during expansionary periods. Even for dividend investors, expansion periods can generate high returns. These stocks are also easy to identify, which makes them a valuable investment option. However, predicting a nation's economy isn't straightforward. Therefore, cyclical stocks carry a high risk for investors. Any sudden fluctuations in a nation's economic activity can severely impact the cyclical stock prices. Nonetheless, they can also carry uncertain profits or returns for investors. On top of that, some cyclical stocks may also be subject to losses during economic booms. What is the difference between Cyclical and Non-Cyclical Stocks?Cyclical stocks include the stocks of a company that gets influenced by a nation's business cycle. On the other hand, non-cyclical stocks do not get impacted by economic activity. These stocks can perform well even in economic downturns. Usually, the underlying companies sell essential items which continue to sell even during a decline in economic activity. For investors, they carry lower risks and rewards. ConclusionCyclical stocks include shares that get affected by a nation’s economic activity. These stocks come from companies that sell products or services that suffer from lower demand during economic downfalls. Cyclical stocks can be highly rewarding for investors. However, they also come with higher risks and uncertain profits. Post Source Here: What are Cyclical Stocks? |
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