Companies that deal with products or services that have inelastic demand are likely to be defensive companies. In simpler terms, anything having ‘inelastic’ demand is something that is an essential good or service, irrespective of price changes. Such products and services include healthcare, water, electricity and fuel.
The stability offered by a defensive company is its greatest attraction. You can invest in a defensive company and in theory the value of your investment should remain relatively intact no matter what the stockmarket is doing. People don’t stop buying groceries or consuming utilities during an economic downturn.
So, does it make defensive companies the best? It certainly does not. Stability is a good feature to have, however it’s also true that a defensive company does not tend to increase in market value as much as other companies during times of prosperity. It is difficult for people to increase exponentially their consumption of utilities or food.
Many investment advisers believe that it’s a good thing to keep a portion of your investment in defensive stocks as it can provide stability and regular income in the case of dividend paying stocks.