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. Why is buying a utility stock known as defensive move?

    Utility stocks are known as defensive stocks for investors due to the fact that consumer demand will remain high even when ...
  2. What are the requirements for being a Public Limited Company?

    Discover the various different requirements that a company must meet in order to be recognized and traded as a public limited ...
  3. Is there a difference between financial spread betting and arbitrage?

    Find out more about financial spread betting, arbitrage and the differences between financial spread betting and the arbitrage ...
  4. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ...
RELATED TERMS
  1. Marginable

    Definition of "marginable."
  2. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
  3. The New Deal

    A series of domestic programs designed to help the United States ...
  4. Valium Picnic

    A market holiday or a slow trading day.
  5. Dividend

    A distribution of a portion of a company's earnings, decided ...
  6. Einhorn Effect

    The sharp drop in a publicly traded company’s share price that ...

You May Also Like

Related Articles
  1. Investing Basics

    Why is buying a utility stock known ...

  2. Fundamental Analysis

    Do Stock Splits Cause Volatility?

  3. Stock Analysis

    Is Bank of America Turning Around?

  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard MSCI EAFE

  5. Active Trading Fundamentals

    Is there a difference between financial ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!