Loading...

Understanding what type of industry the company belongs to in relation to the business cycle.

April 16, 2024
30
36
0
Fred Babu
Author
Fred Babu

Different industries perform differently throughout the different stages of a business cycle.

 

When analysing the industry of a company, you mainly want to understand how that industry performs throughout different parts of the "business cycle" or economic cycle.

 

Here are some of the most common "types" of industries:

- Cyclical
- Defensive
- Growth 

Let's break these down :

 

Cyclical industries tend to follow the business cycle

When the economy is on tear, these companies tend to do well. People have money to spend & can afford products/services

Cyclical industries also tend to really suffer during periods of recession. For example, during covid19

Examples of cyclical industries include but are not limited to:

- Airlines 
- Automotive
- Travel
- Steel
- Construction

Etc.

Think: "Do people need extra money for the product or service?"

 

Defensive industries tend to not do so well but hold their weight better than cyclical industries during rough periods economically.

These industries have products and services  that people will want regardless of what the economy is like.

Examples of defensive industries include:

- Pharmaceuticals 
- Consumer staples
- Tobacco / Alcohol
- Utilities

Etc.

Not a lot of growth potential but steady cash flow and business model.

 

Growth industries, like cyclical industries tend to perform well when the economy is on tear.

During periods of recession, growth industries do not suffer much when compared to other industries.

One primary reason is  due to the exponential growth rate.

Examples of growth industries include:

- Artificial intelligence
- Software development
- Data science

Etc.

 

Each time you're about to invest money into a stock, DO your homework and first understand the industry in which the company you are investing in is from. 

 

Usually, it is very difficult to "time" the economy, just like it is difficult to to "time" the market.

Track relevant news that will help you in your decision making.

Understanding how the stock market is affected by the real economy requires the ability to always learn.

 

The more homework you do, the more confidence you have in your decisions.

Remember, it's your money. You need to make sure you are involved and understand every part of the process.

I hope this helps.

 


Related Tags:
2 min read
Share this article:

Related Articles

All articles
Top