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. Which REITs pay the highest dividends?

    Find out more about real estate investment trusts and which ones have dividend yields greater than 15% for the year 2015.
  3. What is the difference between an Equity REIT and a Mortgage REIT?

    Find out more about real estate investment trusts and the main differences between equity and mortgage real estate investment ...
  4. How does a lack of demand affect financial markets?

    Discover how a lack of demand affects financial markets. A lack of demand leads to a new price equilibrium, as prices dramatically ...
RELATED TERMS
  1. Dividend

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

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

    The amount of a company’s available stock owned by mutual or ...
  4. Market Value

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

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

    The International Finance Corporation is an organization dedicated ...

You May Also Like

Related Articles
  1. Investing Basics

    Why is buying a utility stock known ...

  2. Investing

    Can Mcdonalds Survive Against Fast Casual?

  3. Personal Finance

    How Amazon Fresh Works

  4. Investing

    The Top Non-Soda Companies Owned By ...

  5. Personal Finance

    Top 5 Biggest Mobile E-retailers

Trading Center