Given the difficult state of the market at the moment, I have heard talk of so-called defensive and cyclical shares. What exactly is the difference?
Defensive shares are best described as being industries which are largely unaffected by different parts of the economic cycle, because they provide certain services. For example, the utility companies are classically defensive shares. Whatever the state of the economy, we all continue to need water, electricity and gas. This is not to say that defensive shares will not suffer at all in a prolonged downturn, so much as they will suffer less than their cyclical counterparts. Other sectors, however, are more cyclical by nature, and their fortunes will change as time goes on. For example, at certain times during the economy, the makers of luxury goods and certain retailers will benefit from the consumers feel good factor. Similarly, when things turn tough, so can the performance of these companies shares. The different seasons of the year can also result in a company having busy and quiet periods. In essence, these companies benefit during times of economic growth and then decline during r
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