Defensive Stock
AdvancedA defensive stock is a share in a company whose sales and profits tend to remain stable regardless of the state of the economy, because it sells products or services people need in good times and bad.
Defensive companies operate in industries with steady demand. Common examples include utilities, food and household products, healthcare and some telecoms companies. People still buy groceries, use electricity and need medicine during recessions.
For example, a company making toothpaste and soap usually sees relatively stable sales when the economy weakens, while a carmaker or airline may see sales fall sharply.
Defensive stocks typically have lower betas than the overall market, meaning their prices tend to move less. Many pay regular dividends. Investors often shift towards them when they expect an economic slowdown, which is why they may hold up better in market downturns.
The trade-off is that defensive stocks usually rise less than the market during strong economic expansions. They are not immune to falls: they can be hurt by rising interest rates, which make their dividends less attractive relative to bonds, and by company-specific problems. They are the opposite of cyclical stocks.
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