Defensive stock 

Quick definition

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Updated: Jan 11, 2024

Defensive stocks are shares of a company that provide stability during economic downturns.  

Key details

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  • Defensive stocks are considered safer investments and provide stability no matter what the wider stock market is doing. 
  • Low volatility associated with defensive stocks can lead to small, but consistent gains. 
  • Defensive stocks can be found in a few stock market sectors including: consumer staples, utilities, and healthcare. 

What are defensive stocks?

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Defensive stocks are shares of a company that provides stability no matter what the wider stock market is doing. They belong to companies that have consistent demand for their products and provide stable dividend yields and earnings. A defensive stock’s share price usually remains unaffected during economic downturns and periods of high volatility. 

Due to their track record of stability, defensive stocks are sometimes referred to as ‘safe havens.’ They can be used as a hedge against portfolio risk during recessions or stock market crashes. Defensive stocks provide stability because they belong to sectors where demand for products remains consistent in all economic conditions.  

What are the defining characteristics of defensive stocks?

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1) They hold up well during economic downturns

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Regardless of how the economy is acting, you’re always going to need electricity in your home, and soap and shampoo to keep clean during your daily shower. Companies that offer these products or services may not be sexy, but they’re safe havens during times of economic worry.

2) They lag behind when times are good

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Defensive stocks are capable of going up during boom times for the economy and the stock market, but they’ll likely lag well behind top growth stocks. This means you could be missing out on other opportunities if you buy defensive stocks during bull markets.

3) They don’t offer major growth

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Robust earnings growth is the engine that drives the most successful stocks over the long haul. Defensive stocks usually feature far more tepid earnings growth, favouring stability in the long term instead. So while they can offer relative safety in specifically negative climates, they’ll likely fail to match growth stocks’ performance over the long haul. 

Defensive stock sectors

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Defensive stocks belong to a select few sectors and some of the worlds best known companies fall under these industries. Below are some examples of defensive stock sectors. 

Healthcare

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Pharmaceutical companies and medical device makers are considered defensive stocks. People will always be sick and the healthcare sector is responsible for developing new drugs, vaccines, medical equipment, treatments, and research. Some examples of defensive healthcare stocks are: Johnson & Johnson, Pfizer, and GlaxoSmithKlein. 

Consumer staples

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Businesses operating in the consumer staples industry sell products that are ‘essential’ to everybody. Supermarkets, food producers, beverages, household and personal care, and tobacco companies are all good examples of consumer staples. Some examples of defensive consumer staple stocks include Walmart, Unilever, and British American Tobacco. 

Utilities

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The utilities sector is made up of companies that provide services that are essential for living. Water, gas, and electricity supply are all examples of essential services and stocks within this industry are generally stable in all market conditions. SOme examples of defensive utilities stocks include General Electric, NextEra Energy, and National Grid PLC. 

Pros and cons of defensive stocks

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Defensive stocks have their advantages and disadvantages. The stability and consistency they provide during difficult economic conditions is their top advantage over other types of stocks. However, the slow growth they generate can leave them lacking when markets are in highly bullish cycles. 

Where can I learn more?

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For more information about defensive stocks, and other key financial concepts, check out our full course page. To learn more about investing, our helpful courses will take you through everything you need to know.



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Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.