What defines a defensive stock?

A defensive stock is characterized by its ability to maintain stable earnings and dividends regardless of the state of the economy. This type of stock is typically associated with companies that provide essential goods and services, such as utilities, healthcare, or consumer staples. These companies are less sensitive to economic downturns because their products are always in demand, even during recessionary periods.

This resilience makes defensive stocks attractive to investors looking for stability in their portfolios, particularly when economic conditions are uncertain. The consistent performance and lower volatility associated with these stocks allow investors to weather economic downturns more effectively.

Understanding this concept provides insight into investment strategies during varying market conditions, as defensive stocks can act as a safeguard for investors looking to mitigate risk in their investments.