Investing can seem intimidating for many beginners, but the principles of smart investing can help the average person build an impressive portfolio. Blue-chip stocks are a great way to build a foundation for your investments.
This article will explore the definition and benefits of blue-chip stocks, allowing investors to make well-informed decisions about their portfolios.
How Can You Understand that a Stock is a Blue Chip Stock?
Blue-chip stocks represent the safest, most established investments in the market, and they offer attractive returns. But how can you determine whether a stock is a blue chip?
First and foremost, blue-chip stocks are typically the most well-known and established businesses in the stock market. These are typically large companies that have been around for many years and have a very good track record of sound financial performance. Companies such as Apple, Microsoft, Coca-Cola, and Walmart are all examples of blue-chip stocks
Aside from the financials of the company, blue-chip stocks are also defined by their longevity and stability. They are the type of companies that have managed to maintain their market position despite market volatility and economic downturns
Another factor to consider when determining whether a stock is a blue chip or not is the dividend yield. Blue-chip stocks tend to pay high dividends and tend to remain consistent with those payments, making them a safe and reliable source of income
Finally, you should also look at the stock’s beta, which measures its volatility relative to the market. Blue-chip stocks usually have a beta below 1, meaning they are less volatile than the overall market. This is a sign of stability and key criterion for determining whether or not a stock qualifies as a blue chip.
Why Should You Invest in Blue Chip Stocks?
Blue chip stocks are some of the most reliable investments available. As a general rule, blue chip stocks tend to pay higher dividends, which can generate a steady stream of income for investors. They often have lower volatility and consistent stock price performance, making them less risky than other investments.
Additionally, blue chip stocks are typically associated with heavily established and well-known companies that have stood the test of time and offer a degree of safety compared to other stocks on the market.
What are the Risks of Blue Chips Stocks?
The risks of blue chip stocks are as follows:
- Risk of Overpricing: Blue chip stocks are usually priced higher than other stocks, making them more susceptible to market fluctuations and possibly overpriced.
- Low Dividend Payouts: Because blue chips usually trade at higher prices, they typically have lower dividend payouts, making them a less attractive investment for income investors.
- Lower Returns: Because of the higher prices, blue chips have a higher chance of underperforming the market and providing lower returns than other stocks.
- Difficulty Selling: Blue chips can be harder to sell due to their higher price and lower liquidity. This can be a problem if you need to liquidate your position quickly.
- Exposure to Broader Market: Blue chips are generally more correlated with the broader market than other stocks. This means they will be more impacted by large market swings than other stocks.
What are the Benefits of Blue Chips Stocks?
The benefits of blue chip stocks are:
- Strong Dividend Yields: Blue chip stocks have a history of paying strong dividend yields, which can provide investors with a significant source of passive income.
- Stability: Blue chip stocks have a track record of being stable investments. Their long-term success is often reflected in these stocks’ share prices, which tend to have less volatility than other stocks.
- Low Risk: Blue chip stocks tend to be less risky investments than other stocks as they are often backed by established companies that are better able to manage any downturns in the market.
- High Liquidity: Blue chip stocks tend to be highly liquid assets, meaning they can be bought or sold easily. This can make them attractive to investors who are seeking to liquidate assets quickly
- Value Appreciation Potential: Despite their stability, blue chip stocks can still offer investors the potential for capital gains through long-term value appreciation.
What are The Top Blue Chip Stocks Examples?
Some of the most well-known companies offering blue chip stocks are as follows:
- Apple Inc. – American multinational technology company that designs, develops, and sells consumer electronics, computer software, and online services.
- Microsoft Corporation – American technology company that develops, manufactures, licenses, supports and sells computer software, consumer electronics, and related services.
- Amazon.com – American multinational technology company that focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence.
- Alphabet Inc. – American multinational conglomerate founded in 2015 as a holding company for Google and its subsidiaries.
- Exxon Mobil Corporation – American multinational oil and gas corporation that operates in most countries around the world and is the world’s largest company in terms of revenue
Chevron Corporation – American multinational energy corporation that specializes in oil, natural gas, and geothermal energy production and sales.
