What is a defensive stock?A defensive stock, also known as non-cyclical stock, is a type of stock whose price has a very little correlation with the prevalent economic activities. Irrespective of the performance of the economy, the earnings and revenues of the company remain stable. In such a scenario, the stock price of the company also remains stable.
Example of companies whose stocks are defensive in natureStocks of firms such as FMCG and healthcare belong to the defensive category. This is because even when the economy experiences a downturn, the demand for products of these companies isn’t down. This contributes to the stability of stock prices of these firms.
Cement is another sector whose stocks are defensive. This is because cement finds its application in several domains, with real estate being one of them. Stocks of food and pharma companies are also defensive.
Characteristics of defensive stocksDefensive stocks display certain characteristics. Some of these are:
- Companies issuing these stocks never go out of business
This is one of the major characteristics of defensive stocks. Stocks belonging to the above-mentioned companies never go out of business. When income levels increase in the economy, the products witness increased demand.
There can be occasions where there might be a slight dip in demand for products from these firms but overall, they are quite steady.
- Demand patterns don’t have an element of cyclicality.
Another attribute of these stocks is that their demand patterns don’t have an element of cyclicality. In a typical cycle when the economy is up, so is the stock and vice versa. However, this is not the case with defensive stocks. No matter how the market is performing, these stocks continue to remain stable.
Should you have these stocks in your portfolio?It’s financially prudent to have some of these stocks in your portfolio to hedge against volatility. As these stocks are somewhat latent to market movement, they can cushion your portfolio from taking a major dip in case the market nosedives.
Remember that the objective of these stocks is not to give bumper returns but to provide relative stability to the overall portfolio. Just like selecting other stocks, it’s important to adopt due diligence to make an informed choice.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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