What are defensive stocks?

By Investopedia Staff AAA
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. Who regulates a credit rating agency?

    Find out how American and international regulators interact with Credit Rating Agencies, and learn about the rules adopted ...
  2. What are the differences between dilutive securities and antidilutive securities?

    Learn how investors and accountants apply the terms "dilutive" and "antidilutive" to securities or the exercise of security ...
  3. What are the main reasons for why there could be a negative gross profit margin and ...

    Find out how to calculate a company's gross profit margin, why a firm might experience a negative margin and how to interpret ...
  4. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ...
RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Acquisition

    A corporate action in which a company buys most, if not all, ...
  3. International Finance Corporation

    The International Finance Corporation is an organization dedicated ...
  4. International Finance

    Definition of international finance
  5. Bidder

    The party offering to buy an asset from a seller at a specific ...
  6. Global Recession

    An extended period of economic decline around the world. The ...
Related Articles
  1. Investing News

    Alibaba's Top Competitors

  2. Investing Basics

    Analysis of Companies with high goodwill

  3. Investing Basics

    What Does The Dow Jones Industrial Average ...

  4. The Nikkei index is synonymous with Japan's economy, the third-largest in the world. Here's the easiest way to take a stake.
    Mutual Funds & ETFs

    How To Invest In The Nikkei 225

  5. If you want to keep your finger on the pulse of the Japanese economy and stock market pay attention to the bellwether Nikkei 225.
    Investing Basics

    A Guide To Japan’s Nikkei 225 Index

Trading Center