A:

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.

RELATED FAQS
  1. What other sectors besides utilities are known as defensive?

    See why certain sectors, other than utilities, are considered defensive and therefore more resistant to the downturns of ... Read Answer >>
  2. What is the difference between cyclical and non-cyclical stocks?

    Understand the difference between cyclical stocks and non-cyclical stocks. Learn about the underlying demand factors of each ... Read Answer >>
  3. At what stage of the economic cycle should I invest in the utilities sector?

    Learn the best stage to invest in the utilities sector. Utilities are a defensive sector due to their steady business and ... Read Answer >>
  4. What are the benefits of investing in a cyclical stock?

    Understand the benefits of investing in a cyclical stock. Learn how an investor can use those benefits to potentially reduce ... Read Answer >>
  5. What techniques are most useful for hedging exposure to the financial services sector?

    Learn how smart investors hedge exposure to the financial services sector by also investing in utilities, blue chips and ... Read Answer >>
Related Articles
  1. Insights

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing

    5 Best Defensive Mutual Funds for 2016

    Find out the best defensive mutual funds for providing your portfolio with downside protection during the next stock market decline.
  3. Investing

    Why Apple Can Be a Value Stock But Not a Defensive Stock (AAPL)

    Examine Apple's 2016 price decline to identify its potential as a value stock. Contrast Apple's characteristics with defensive stocks.
  4. Insights

    What's a Cyclical Industry?

    A cyclical industry is correlated to the business cycle.
  5. Investing

    Defense & Aerospace Stocks: Are These 2016's Best?

    These four defense stocks offer potential in 2016, each in different ways.
  6. Investing

    Best Places to Find High-Dividend Yield Stocks

    Learn about the advantages of stocks with good dividend yields, such as income, stocks in defensive sectors and strong-performing companies.
  7. Investing

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  8. Investing

    Do Defensive ETFs Offer Value in Today's Market? (XLU, NEE)

    Discover why defensive ETFs are essential additions to equity portfolios, and learn about three defensive ETFs that combined to beat the S&P 500 over 10 years.
  9. Investing

    The 3 Highest Yielding Defense Stocks

    Despite challenges, the largest defense firms will remain an integral part of the defense industry and possess yields that should appeal to investors.
  10. Trading

    Surviving Bear Country

    Stay calm, play dead and keep your eyes open for attractive valuations.
RELATED TERMS
  1. Defensive Stock

    A stock that provides a constant dividend and stable earnings ...
  2. Defensive Buy

    Securities or investments that are perceived as being lower risk ...
  3. War Babies

    A name given to securities in companies that are defense contractors. ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in ...
  5. Capital Goods Sector

    A category of stocks related to the manufacture or distribution ...
  6. Defensive Investment Strategy

    A conservative method of portfolio allocation and management ...
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center