How Can You Identify A Cyclical Stock?

Uncertain about a stock's cyclicality? Examine the beta value. Based on how sensitive a stock is to movements in the market, a beta coefficient or value is assigned to it. This is determined by comparing individual returns to market returns overall. A stock is equal to the market if it receives a score of one. More volatility is indicated by a higher score. There will be a lot of cyclical stocks with higher beta coefficients.

Due to the nature of the economy and what is happening in a certain industry at any one moment, it can be difficult to anticipate how much a cyclical stock's value will increase or decrease.

Consider Airbnb, which went public at the height of the coronavirus outbreak. The company's house-sharing business strategy hinges on how much demand there is for lodging among travelers. The timing of an IPO at $68 per share seemed hazardous due to the expansion of travel restrictions around the world, but by the conclusion of the first trading day, shares had increased to $144. 

For investors, this was a spectacular but transient success story. The price had bottomed out at $125.16 and in a matter of days had fallen to $130 a share. Good for those who bought early, not so good for those who bought later. 

Investing in cyclical companies is riskier because of this volatility than it is to stick with dependable stocks like blue-chip stocks, whose returns are more predictable over the long term.