What are Defensive Stocks?
Defensive stocks are normally found in industries that manufacture products meant to meet the needs of consumers. These companies are not affected by the business cycle, making it a good investment anytime of the year.
Aside from this, defensive stocks also don’t attain too much
damage when the market crashes. Companies included in the defensive stocks
don’t get too affected even when the economy is in a bad shape. Neither does it
get too big of a boost when the economy is booming.
The best time to buy noncyclical stocks is right before the
economy makes a downturn. This is generally the reason why these stocks are
referred to as defensive stocks. They provide investors with a safety net that
they can easily fall back on during times when the market or economy is
unstable.
Basically, the products of these companies are needed by
people to get through every day, like food and beverages, utilities, as well as
health care. Since electricity, running water, food, and gasoline are basic
necessities, the demand is usually stable all-year-round.
You should keep in mind that steadiness is not always a good
thing. It means that you won’t feel the damage too much but it makes gaining
profit not too reliable. You will have a steady flow of profit from the defensive
stocks, but you shouldn’t expect for it to rise drastically.
Pros and Cons
Pros
- Does not get easily affected by what takes place during a recession.
- Defensive stocks are safe haven to investors during hard times. You can rely on defensive stocks to fall back on in times when the economy is in a not-so-good position.
- Gain a conservative portfolio as well as profits even during recessionary times.
Cons
- Not advisable if you expect to make healthy profits on the stock market.
- Defensive stocks are less likely to increase in value just as they are unlikely to fall.
- Rising interest rates can push the value of defensive stocks lower. When interest rates go up, other investments become more attractive to investors.
- Interest rate hikes can affect the company’s financial strength in a negative way. If the company has to pay more interest, its earning might be affected significantly. This can then lead to its ability to continue paying dividends.
Example of Defensive Stocks
Defensive stocks can be divided into two classifications:
the food, beverage, and utility companies; and the companies that produce
non-durable goods. The latter includes companies manufacturing household goods
such as soap, detergent, and toothpaste.
Here are some of the companies classified as defensive
stocks:
-
Kraft Heinz
Company/Kraft Foods Inc.
-
Johnson &
Johnson
-
Sysco Corporation
-
Pfizer Inc.
-
Abbott Laboratories
-
SSE plc
-
Unilever
-
HCA Holdings,
Inc.
-
Johnson Matthey
Conclusion
You can choose the stock you invest in solely based on what
you want or what you need in a financial sense. It’s important to learn as much
as you can before you dive right in. Don’t forget to do your research. But it’s
also important to consider that experience can teach you a lot more stuff,
better than simply reading about it online.
Test your skills in stock trading at FSMSmart! We will provide
you with daily market updates and help you stay
up-to-date with economic
events. Register for an account now!
