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Defensive Stocks

Defensive stocks are the stocks of companies that tend to hold their price levels when the economy declines.

Generally, these stocks resist downturns in the economy because these companies produce necessary goods (food, beverages, and pharmaceutical products). However, during periods of economic expansion, defensive stocks move up more slowly than other types of stocks.

Additional Comments:

Defensive stocks are the stocks of companies whose prices are expected to remain stable or do well when the economy declines because they are immune to changes in the economy and are not affected by downturns in the business cycle. Examples of stocks of this type are drug companies, food and beverage companies, utility companies, consumer goods companies, and even auto parts manufacturers.

In a recession, people generally wait to replace their cars and are more likely to spend money to repair them. Similarly, during periods of inflation, the prices of gold stocks tend to rise. Drug companies have predictable earnings, which puts them in the defensive category and also the growth stock category because of their pipelines of new drugs. If the economy goes into a deflationary environment, the stocks of some supermarket chains, which are viewed as defensive-type stocks, might fall out of this category because supermarket chains generally have low profit margins and cannot pass higher prices on to consumers.

Many investors buy defensive stocks ahead of an economic downturn and hold them until better economic times.  

Related Terms:

Cyclical Stocks
Cyclical stock prices move with the economy. Cyclical stocks often reach their high and low points ...

Value Stocks
Value stocks are stocks that have lower prices relative to their fundamental values (growth in sales ...

Income Stocks
Income stocks have high dividend payouts, and the companies are typically in the mature stages of ...

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