What Is the Difference Between a Cyclical Stock & a Secular Stock?

What Is the Difference Between a Cyclical Stock & a Secular Stock?
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Cyclical stocks and secular stocks don't have anything to do with bikes or religion. The terms refer to when they gain ground relative to what's going on in the economy. Cyclical stocks rise with the economy, while secular stocks can gain in both good and bad times.

Cyclical Stocks

Cyclical stocks belong to companies that sell a product or service for which demand can vary. For instance, if your computer starts to run slow, you could buy a new one, do a little drive-cleaning or live with it being slow. Other cyclical products include large machine tools and luxury goods. When the economy does well, their products sell and the value of their stock usually goes up. In a down economy, people stop buying them and the company's stock can drop.

Secular Stocks

Secular stocks belong to companies that sell products for which demand remains about the same, regardless of the economy. The classic examples of cyclical stocks are those of food and consumer-products companies. If you run out of milk or toilet paper you might look around to find it on sale, but you're going to buy more of it. Drug makers are also usually considered secular stocks as well.

When to Buy

Buying cyclical stocks is a good idea if you think the economy is doing well because you can ride their expected growth. To maximize your returns takes careful timing, though, as buying just as an upswing starts and selling right at the peak of the market can be tricky. Timing the purchase of secular stocks is a little bit easier because you're not depending on the economy for impetus. You're just looking for a solid performer. In addition, since secular stocks are less likely to have broad price fluctuations, there's less harm in owning them for long periods.

Market Meanings

When the terms cyclical and secular are used to describe the entire market instead of stocks, they can sometimes have a slightly different meaning. In markets, they refer to general movement. When a market hits a low that's not expected to be seen for years to come, it can be referred to as entering a secular bull market phase. In other words, things have gotten as bad as they're going to get for a while, so stocks will be on a general upward trend for years to come. A cyclical market, on the other hand, refers to a shorter-term trend.