7 Things Every Trader Needs to Know About Defensive Stocks

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It’s needless to say that almost every trader has only one thing on his mind, to grow his wealth over time. However, it should be said that this is not the right way to do it. There are some other things that require your attention, which is going to provide you with much more benefits in the future. Being able to make smart decisions about investing, a trader will make a portfolio that will protect him from the potential downturns, in a financial way, of course.

Without any doubt, one of the most important things traders need to be fully aware of are defensive stocks. Sadly, we can see that not many traders pay attention to it, and it should be said that this is a mistake that could cost them pretty much down the road. The whole point of defensive stocks is that they have the goal of protecting the investment portfolio from potential loss. If you would like to learn more about these, take a look at samuelssonsrapport.se and inform yourself about the whole concept much more.

While they will not provide you with a huge growth of potential pretty fast, you can be sure that they will make the problem of consistency go away. You can look at these as some kind of umbrella that will provide you with a chance to shield your stocks from suffering a massive loss down the road. Now that we’ve provided you with some basic information about this concept, we would like to talk about a few things every trader needs to be fully aware of when it comes to defensive stocks. Without further ado, let’s talk about these.

High Dividend Yield Stocks

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The first and most important thing every trader needs to know about defensive stocks is high-dividend yield stocks. This is a good opportunity for companies who have high cash flow on a yearly level and have a lot of available options for the future. When we say this, we mean that they can be used for the future expansions of a business. High dividends represent a pretty good way of distribution for these goals. There are numerous examples of companies that have a high cash flow and who are using this approach to make their profits much safer down the road.

No Cyclicality

Stocks with non-cyclicality are perceived as defensive shares. Traders are interested in consuming these utilities of services and products no matter what’s their status on the market. To provide you with an example, we would like to say that the manufacturers of toothpaste and soaps are among the most popular defensive shares. It doesn’t matter what’s the current situation on the world market, people will always need electricity, gas, food, and water. Therefore, these defensive stocks are perceived as the ones who will never fail, no matter what the current situation is. You can rest assured that they will perform pretty well at any time.

Stable and Matured Businesses

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When talking about businesses with defensive stocks, they can be described as either stable or matured business models. If a certain business has a strong advantage over its competition, chances of protecting the shares, and their profitability for much more time. Therefore, investable and solid businesses are often described as defensive shares that are performing pretty well, with all the factors in the market. Therefore, investing in some of these companies is often considered as one of the best moves you can make in the market, you can be sure of that.

Low Beta Stocks

One of the most important things every trader needs to take a look at the stock’s risk or vulnerability factor. When looking at cyclical stocks, you will see that they are prone to have a beta that’s close to the market. If we take a look at the case when we have a beta of 1, this means that the stock will have the opportunity to move down or up on levels that are greater than the market itself. When it comes to defensive shares, you can see that they have a beta lower than 1. That means that they are less volatile. They are not prone to movements in the market. This means that changes in the condition are not likely to be so massive.

Interest Rate Risk

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It can be said that there are a lot of different investors who are suspecting that defensive stocks are nothing more than bond proxies. These are often sensitive to interest rate movements. However, it can be said that the duration and magnitude of the interest rate change and provide them with a wide array of different scenarios. But, when we are talking about long-term time periods, we can see that this interest rate tends to decrease. This is the reason why so many people don’t find defensive shares so interesting and they don’t invest in them.

Low Price to Earnings Ratio Stocks

There are some companies that have low price-to-earnings ratios. When you take a look at their valuation, you will see that these are on the much lower side when compared with other organizations on the market. When talking about examples of these companies, we would like to point out oil marketing organizations. We can see that there are not so many downsides to these when you take a look at their history, especially on profit growths and historical revenue.

Overcrowding Risk

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There is one serious danger when it comes to defensive stocks. We are talking about the risk of overcrowding. This can happen because something can lead to a high concentration in an individual sector or even countries. Even though diversity is something we can describe as a good thing, it could lead to overcrowding, as we’ve already mentioned. When this happens, some strategies can be susceptible to fail much more when compared to the situation when there are not too many traders involved.

The Bottom Line

Knowing all about defensive stocks is highly important, especially before you invest in them. So, we’ve provided you with the most important things you need to know about these.


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