War babies are securities issued by companies in the defense industry.
How It Works
Let's assume Company XYZ builds jets for the Navy, and Company ABC builds guns for the Army. Both are public companies, and both are borrowing money by issuing bonds. The stocks and bonds of these companies are called war babies.
Why It Matters
War babies are securities from companies that create tools, services and intelligence needed during war. Accordingly, when a country is at war or may go to war, companies like Company XYZ and Company ABC will sell more and thus profit more. In turn, the value of their securities will likely rise.
Conversely, war babies will usually lose value when conflicts decrease or cease. However, it is important to note that even when a country is not at war, governments are still interested in maintaining their defenses and will thus usually have some level of consistent business for these companies. It is also important to note that these companies have an unusual kind of risk -- they largely depend on one customer (the government).