What Is a Defensive Stock? Safe Shares During a Recession
•By Mahersaham Team
Artikel ini juga tersedia dalam Bahasa Melayu
What Is a Defensive Stock?
A defensive stock is a type of share that performs steadily regardless of the current economic conditions. Defensive stocks are also known as non-cyclical stocks.
Characteristics of Defensive Stocks / Non-Cyclical Stocks
- Pays consistent dividends
- Stable company earnings
- Not heavily affected by the current economic climate
- Products always have demand
- Large, well-established companies
Advantages of Defensive Stocks
- More suited for long-term gains
- Low risk
- Low but steady returns
- Low volatility
- Primarily favoured by investors rather than traders
Disadvantages of Defensive Stocks
Defensive stocks typically cannot ride the market rally when the market is trending upward.
Sectors commonly associated with defensive stocks are those that produce essential consumer goods:
- Utilities
- Consumer Products
- Healthcare
- REITs (Real Estate Investment Trusts)
So, the question is:
What type of investor are you?
Aggressive, moderate, or conservative?
Why Choose Defensive Stocks
1. Helps reduce portfolio volatility
Diversifying the types of holdings in your portfolio can help reduce investment risk. Especially during an economic downturn, defensive stocks can help investors reduce the volatility of their portfolio returns.
This is because defensive stocks can act as a shield, protecting your share investments from significant losses. The element of uncertainty in the economy will inevitably bring both profits and losses for investors.
2. A suitable choice for stock market beginners
Investors can choose defensive stocks when entering the stock market. This is because defensive stocks are suitable for newbie investors and those with limited experience in share investing. Additionally, defensive stocks are an ideal choice for risk-averse investors.
3. Dividend income from share investments
Defensive stocks are often the preferred choice of investors rather than traders. This is because defensive stocks are well-suited for the long term, and the income from investment returns is stable.
Conclusion
A defensive stock is a type of share investment that can protect an investor''s capital and reduce the risk of share investing.
Want to learn more about other types of stocks in the market?
- Speculative Stock. Click here.
- Cyclical Stock. Click here.
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FAQ About Defensive Stocks
What is the difference between defensive and cyclical stocks?
Defensive stocks remain stable regardless of economic conditions, while cyclical stocks follow the economic cycle — rising during booms and falling during recessions. Defensive stocks are from sectors like utilities and healthcare, whereas cyclical stocks are from sectors like property and automotive.
Are defensive stocks suitable for beginners?
Yes, defensive stocks are very suitable for beginners because they carry lower risk and provide stable returns. They are an excellent starting point for new investors who want to build confidence in the stock market.
Do defensive stocks pay dividends?
Yes, one of the key characteristics of defensive stocks is that they pay consistent dividends. Companies in sectors such as utilities and consumer products typically generate steady cash flow, which allows them to distribute regular dividends to shareholders.