Defensive stocks explained

A defensive stock or a sector is one which tends to remain stable under difficult economic conditions. Defensive stocks include pharmaceuticals, food, tobacco, oil, alcohol, and utilities (gas, water, electricity). These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. 




Defensive stocks are also sometimes called as bear market stocks. Mutual funds typically invest in these stocks during difficult times as they necessarily have to stay invested. So these stocks do not correct much in bear markets.


A defensive stock usually provides a constant dividend and stable earnings regardless of the state of the overall stock market. They remain stable during the various phases of the business cycle. During recessions they tend to perform better than the market; however, during an expansion phase it performs below the market.