What is a common characteristic of cyclical stocks?

Cyclical stocks are characterized by their sensitivity to economic cycles, meaning their performance and valuation tend to fluctuate in correlation with the overall economy. During periods of economic growth, cyclical stocks often perform well due to increased consumer spending and demand for goods and services. Conversely, during economic downturns, these stocks typically decline in value as consumers reduce spending.

This characteristic makes cyclical stocks appealing to investors who are willing to take on higher risk for the potential reward of greater returns during boom periods. Understanding the nature of these stocks helps investors make informed decisions about when to buy or sell based on their predictions of economic conditions.

While some cyclical stocks may provide dividends, these are not consistent across the board, as the dividends can change based on the company's financial health during different economic phases. They are not necessarily low-risk investments, as their value is closely tied to volatile economic conditions. Additionally, blue-chip stocks refer to established, financially sound companies with a history of reliable performance and dividends, which is distinct from the nature of cyclical stocks.