The term defensive stocks is synonymous to non-cyclical stocks, or companies whose business performance and sales are not highly correlated with the larger economic cycle. These companies are seen as good investments when the economy sours.

As their name suggests, defensive stocks will defend your portfolio from losses typically sustained during recessionary periods. Defensive companies are those whose business is not highly dependent on economic prosperity. Car manufacturers, for example, are not defensive stocks: people buy cars when things are going well, but postpone car purchases when times are tougher. Car manufacturers often see their revenues decline drastically during economic recessions. By contrast, companies in the utilities sector are defensive stocks. Even in times of economic hardship, people need to keep their families warm (using natural gas, in most cases) and light their houses (using electricity). Unlike a new car, utilities are essential and cannot be put off. Therefore, because defensive-type companies such as utilities have more consistent sales, their stocks are seen as smart investments during an economic downturn.

To learn more on this subject, check out Cyclical Versus Non-Cyclical Stocks.

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