Securities that are considered to be more stable in price in a market where prices are falling. A stock that tends to remain stable under difficult economic conditions. During market turmoil defensive stocks can provide a steady income. But what makes a stock defensive?
For example, some shares are well-positioned to withstand recession, because the goods and services they sell are essential items rather than luxuries.
Defensive stocks include food groups, tobacco companies, oil, utilities and banks are traditionally regarded as good defensive stocks, and when the market turns bearish there will be talk about a 'flight' to these kinds of stocks.
These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.
Defensive stocks are those to which traders flee during periods of weakness in volatile, high flying stocks. It is a stock that provides consistent earnings no matter what the state of the overall stock market is. An example of a volatile group in recent years would be high-technology.
In the most recent dictionary entry, we can find the term "cyclical stock".
A cyclical stock is a stock that does better when the economy is expanding, and worse when the economy is contracting.
An example of a cyclical company would be a car manufacturer.
Now, "defensive stocks" hold up much better when the economy is slowing or in a full-blown recession.
Why?
"Defensive stocks" are companies that don't experience a noticeable downtick in revenues when the economy goes south.
Food companies. Tobacco companies. Health care companies.
Smokers are still going to buy cigarettes in a recession. People are still going to buy dinner at McDonald's in a depression.
These are "defensive" companies, meaning - if you want to protect your portfolio in a recession, you will turn to "defensive stocks" such as McDonald's or Philip Morris.
Cyclical companies, on the other hand, will perform (by definition) poorly during times of economic distress.
The same attributes are always cited when investors attempt to define a defensive stock:
For example, some shares are well-positioned to withstand recession, because the goods and services they sell are essential items rather than luxuries.
Defensive stocks include food groups, tobacco companies, oil, utilities and banks are traditionally regarded as good defensive stocks, and when the market turns bearish there will be talk about a 'flight' to these kinds of stocks.
These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.
Defensive stocks are those to which traders flee during periods of weakness in volatile, high flying stocks. It is a stock that provides consistent earnings no matter what the state of the overall stock market is. An example of a volatile group in recent years would be high-technology.
In the most recent dictionary entry, we can find the term "cyclical stock".
A cyclical stock is a stock that does better when the economy is expanding, and worse when the economy is contracting.
An example of a cyclical company would be a car manufacturer.
Now, "defensive stocks" hold up much better when the economy is slowing or in a full-blown recession.
Why?
"Defensive stocks" are companies that don't experience a noticeable downtick in revenues when the economy goes south.
Food companies. Tobacco companies. Health care companies.
Smokers are still going to buy cigarettes in a recession. People are still going to buy dinner at McDonald's in a depression.
These are "defensive" companies, meaning - if you want to protect your portfolio in a recession, you will turn to "defensive stocks" such as McDonald's or Philip Morris.
Cyclical companies, on the other hand, will perform (by definition) poorly during times of economic distress.
The same attributes are always cited when investors attempt to define a defensive stock:
- That they are non-cyclical. That is, they produce solid earnings irrespective of the performance of the larger economy.
- That they offer higher-than-average dividend yields.
- That they are linked to either basic human needs or addictions, so defensive stocks are often connected with food and drink, power, water, health, smoking and alcohol. The 'defensive' sectors are therefore typically utilities, telecoms, pharmaceutical, beverage, food retail and tobacco.
Thanks for the info on defensive stocks!
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