Investing is an excellent way of making your money work for you. Growing wealth over many years requires a lot of strategic planning and years of making smart investments. Whether new to investing or considering teaching your child to invest, defensive stocks are a great way to ensure you make the most of your money.
What Are Defensive Stocks?
Defensive stocks are equities that provide reliable earnings and consistent returns even during times of economic downturn.
These stocks perform well during tough economic times because they are from industries that are always in demand.
Below are some examples of defensive stocks:
Utilities
These are the gas, water, and electricity bills you must pay monthly or quarterly, depending on your agreement with your supplier. If you invest in a utility company, you'll benefit from their consistent return because they will always be in business.
Consumer staples
Consumer staples are goods people buy out of necessity, regardless of the country's economic state—things like food, beverage, hygiene products and household items. These companies generate a steady income and will always be in business.
Healthcare stocks
Healthcare is a necessity; the sick need medicine to treat their illness. It is important to note that historically, these were defensive stocks, but because of the fierce competition and uncertainty around regulations, they can affect the return on your healthcare investment. It is best to ensure that before you invest, you research the market to ensure you are investing in a stock that the appropriate bodies have approved.
Real Estate
People will always need a roof over their head. If you are investing in real-estate, ensure that you stick to residential buildings and flats in areas that are always sought after. Try to avoid ultra-high-end apartments and office buildings, which could cause an increase in lease cost when business slows down.
How Does Defensive Stocks Differ from Other Types of Stocks?
Defensive stocks differ significantly from other types of stocks, primarily because of their performance during turbulent economic times.
Below are some critical characteristics of defensive stocks that make them stand out compared to other stock types.
- Stability in economic downturns: Defensive stocks are known for their ability to perform well during turbulent economic times. They perform well, even when the economy is struggling. This is because it is associated with stocks that are always necessary for households all year round.
- Non-Cyclical Industries: These types of industries are less affected by changes in the economic markets. For example, companies that sell food, healthcare, and household items will always be in high demand. This is because people will continue to consume these types of products even during periods of economic uncertainty.
- High Consumer Demand: Most defensive stocks are associated with products and services always in demand. Consumer staples such as food, beverages, and household items also fall into this category.
- Reduced Risk: Investors often turn to investing in defensive stocks in times of economic uncertainty. During these times, many investors prefer the safety and stability these kinds of stocks offer. On the other hand, growth stocks are expected to provide high returns but are riskier than defensive stocks.
How Do Defensive Stocks Maintain Stability During an Economic Downturn?
Defensive stocks tend to have a low beta, which is a measure of a stock’s volatility compared to the market performance. These types of stocks also have a value of less than one, indicating that the stock tends to be less volatile than the market. When a stock is not as volatile as the market it has a high certainty of performing well when the market is unstable.
The main characteristic that ensures defensive stocks remain stable is their ability to be in high demand even during periods of economic uncertainty.
This takes us to our next point.
What Characteristics Make a Stock Defensive and Resilient to Market Fluctuations?
Defensive stocks have many key characteristics that make them resilient to market fluctuations. These features make them stable and popular among investors looking for a haven in volatile markets.
The following features contribute to a defensive stock’s resilience against market fluctuations.
- Low-price elasticity: Defensive stocks have a low-price elasticity, which means that even though the price for their products might change – demand will still be high. For example, even if food prices are high, people will still purchase food in high quantities.
- Resilient earnings: Defensive stocks are more stable and resilient than other types of stocks because of their ability to make a profit even during times of economic uncertainty.
- Long-term focus: Many defensive companies have a long-term vision and strategic plan for the years ahead. They prioritize stability and sustainability over short-term growth. Such qualities have kept these companies in thriving status over several years.
- Regulatory protection: Sometimes, defensive industries, such as healthcare and drug industries, benefit from regulatory protections and policies that provide stability and trust.
- Strong market position: Defensive stocks are mainly market leaders in the economic sphere. Having a strong market and brand position allows these companies to continue dominating even during times of economic uncertainty.
- Reliable cash flow: Defensive stocks are associated with companies that generate a steady and reliable cash flow. For example, companies with high and steady demand throughout all seasons, including during tough economic times, tend to be in the defensive industry.
Investors prefer to put their money into defensive stocks because it will earn them a steady cash flow even during economic uncertainty. Whether you are new to investing or you are teaching your children about investing, defensive stocks are a great option to keep your money working hard to generate even more money.
Defensive stocks are characterized by their stability, consistent dividend payments, and ability to weather an economic downturn. Staple goods are great examples of defensive stocks as they will always be in demand. As you teach your kids to invest, share with them the key benefits of choosing to invest in a defensive stock.
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