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Defensive stocks, sometimes called non-cyclical stocks, are so named because of their position in the economy. Cyclical stocks occupy positions in the economy that makes prices rise at greater-then-average rates during economic booms and sink more quickly during recessions. Defensive stocks are generally unaffected by trends in the economy.
There are some items that we feel we simply cannot live without, and won't cut back on even when times are tough. The stocks of companies producing these things are non-cyclical and are "defended" against the effects of economic downturn, providing great places to invest when the economic outlook is sour.
For example, energy is always required to power our homes and businesses and the stocks of utility companies often continue to proper even when the rest of the economy is sinking. The same goes for companies that produce pharmaceutical drugs.
The downside to defensive stocks is the same as with every other conservative investment: when the boom comes and the economy begins to soar, defensive stocks will be far outpaced by other classifications like cyclical stocks, growth stocks and so on. This can cause a little distress to traders who seek high capital gains. Nevertheless, people who are basically familiar with the rules of cyclical investing will be able to keep pace with the relatively gentle ups and downs of the economy, and adjust their portfolios accordingly.
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