Not all stocks are made equal – some simply zoom ahead while others fizzle out. The changes in the economy like a recession or a bearish bias can further obscure the already complex landscape of stock trading. Even though enrolling in good trading education classes can help you to navigate the tricky waters of the market, you may still end up skipping a few important trading terms. This is precisely why following good blogs and online courses on stocks are important in order to stay ahead in the game.
One of the measures taken by traders as well as investors during market downturns or grim economic conditions is adding defensive stocks to the portfolio. If you wish to learn more about defensive stocks, read on!
What are defensive stocks? The stocks of companies whose services or products are constantly in demand are called as defensive stocks or non-cyclical stocks.
For instance, electricity and gas are basic needs of people, making utility industry a good example of defensive stocks. In a similar vein, companies that manufacture or distribute consumer staples like beverages, food, hygiene products, medicines etc are also defensive stocks as people buy these irrespective of the prevailing economic conditions.
Defensive stocks will have a stock beta value of less than 1.0 as their price swings will always remain lesser than the price movement of the overall stock market. When the beta value of a stock is more than 1.0, it means that the price movements will be more volatile than the stock market. On the other hand, a beta of less than 1.0 implies lesser volatility and risk, as well as lower overall return compared to stock market.
Market Sectors of Defensive Stocks: Defensive stocks comprises of companies that belong to mainly four market sectors. They are Utilities, Healthcare, Non-Durable Goods, and Food and Beverages.
- Utilities: This includes heating fuel oil, electricity, natural gas, propane, and water.
- Healthcare: This includes insurance companies, testing labs, pharmaceutical and medical device manufacturers etc.
- Non-Durable Goods: This includes companies that manufacture products like soap, toothpaste, laundry detergent etc.
- Food and Beverages: This includes producers of food products, benerages, and even some fast food chains.
Advantage and Disadvantage: The biggest advantage of investing in defensive stocks is that it gives an above-average return during a recession or hard economic times. On the other hand, whenever the economy recovers, the returns from these defensive stocks will be quite minimal.
When should you buy defensive stocks? The ideal time to invest in defensive stocks is when the economy seems to be entering turbulent times, preferably before the start of the bear market. Meanwhile, if the market is entering a bull run or is on a continued bullish bias, it is best to invest in defensive stocks minimally or avoid investing in them altogether.
As you can see, defensive stocks are quite useful to have in your portfolio, especially during a rough patch of economy or recession. Continuing with your stock trading education can help you in not only understanding the various trading terms but also assist you in formulating a customized trading and investing strategy based on the prevailing market conditions.