Defensive Stock

What is a 'Defensive Stock'

A defensive stock is 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Defensive Buy

    Securities or investments that are perceived as being lower risk ...
  2. Defensive Company

    A corporation whose sales and earnings remain relatively stable ...
  3. Defensive Acquisition

    The act of firms acquiring other firms and assets as a defense ...
  4. War Babies

    A name given to securities in companies that are defense contractors. ...
  5. Peace Dividend

    The money that becomes available in a national government's budget ...
  6. Pac-Man

    A high-risk hostile takeover defense in which the target firm ...
Related Articles
  1. Active Trading

    Guard Your Portfolio With Defensive Stocks

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

    Take Stock In Defensive Industries

    Stay calm, play dead and keep your eyes open for attractive valuations.
  3. Professionals

    Stock Classification Risks

    Series 7 - Section 2: Stock Classification Risks
  4. Professionals

    Analyzing a Company - Types of Stock

    CFA Level 1 - Analyzing a Company - Types of Stock. Learn the various kinds of company and stock classifications. Differentiates growth, defensive, cyclical and speculative stocks and companies.
  5. Mutual Funds & ETFs

    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.
  6. Stock Analysis

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

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

    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.
  8. Investing Basics

    5 Popular Portfolio Types

    One of the best ways to mitigate risk and realize strong returns is by diversifying your investment portfolio. This can be accomplished in several ways.
  9. Economics

    Riding The Bear Into A Bull Market

    How can you get back into the market to avoid missing market recovery gains? Find out here.
  10. Investing Basics

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
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 ... Read Answer >>
  2. 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 >>
  3. What are defensive stocks?

    The term defensive stocks is synonymous to non-cyclical stocks, or companies whose business performance and sales are not ... Read Answer >>
  4. What are the safest investments during a bear market?

    Learn what investments carry the least amount of risk during a bear market and how they can be used to hedge against falling ... Read Answer >>
  5. What other sectors are most highly correlated with the aerospace sector?

    Learn about the aerospace industry and two closely related industries that share many of the same characteristics. Discover ... Read Answer >>
  6. How does beta measure a stock's market risk?

    Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. 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 ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center