Investopedia

Continue to Site »

Defensive Stock

Filed Under » , , , ,
Dictionary Says

Definition of 'Defensive Stock'

A stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.

This is not to be confused with a "defense stock", which refers to stock in companies which manufacture things like weapons, ammunition and fighter jets.
Investopedia Says

Investopedia explains 'Defensive Stock'

Defensive stocks remain stable during the various phases of the business cycle. During recessions they tend to perform better than the market; however, during an expansion phase it performs below the market. Betas of defensive stocks are less than one.

To illustrate this phenomenon, consider a stock with a beta of 0.5. If the market is expected to drop 15%, and the existing risk-free rate is 3%, a defensive stock will only drop 9% (0.5*(-15%-3%)). On the other hand, if the market is expected to increase 15%, with a risk-free rate of 3%, a defensive stock will only increase 6% (0.5*(15%-3%)).

The utility industry is an example of defensive stocks because during all phases of the business cycle, people need gas and electricity. Many active investors will invest in defensive stocks if a market downturn is expected. However, if the market is expected to prosper, active investors will often choose stocks with higher betas in an attempt to maximize return.

Also known as a "non-cyclical stock" because it is not highly correlated with the business cycle.

Articles Of Interest

  1.

    5 Popular Portfolio Types

    Learning how to build these portfolios will increase your investing confidence and give you financial control.

  2. Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.

  3. The Impact Of An Inverted Yield Curve

    Find out what happens when short-term interest rates exceed long-term rates.

  4. Will A New Fund Manager Cost You?

    Learn how a change in leadership could mean more taxes for you.

  5. Guard Your Portfolio With Defensive Stocks

    Find out how these securities can protect you from a market bust.

  6. Cyclical Versus Non-Cyclical Stocks

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

  7. What are defensive stocks?

    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 ...

  8. Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.

  9. Why Your Pension Plan Has Sovereign Debt In It

    One type of security pensions tend to invest in is sovereign debt, or debt issued by a government.

  10. Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Disaster Loss

    A special type of tax-deductible loss, similar to a casualty loss, where a loss has been incurred by taxpayers who reside in an area that has been designated as a federal disaster area by the President.

  2. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.

  3. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

  4. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  5. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  6. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.
Trading Center
Array ( )
taggroups(for debug only):
Array ( [0] => Investing [1] => SEG (Investors) [2] => Economy And Economics [3] => Markets [6] => Investing-Basics ) time:14ms