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What are Blue-Chip Stocks? | Investing in Blue Chips


In order to become a successful investor, you must acquire a solid knowledge of advanced financial tools. That’s why comprehension of how blue-chip stocks work is one of the key skills a prosperous investor should possess to stay at the forefront of finance.

The article covers the following subjects:

In this article, we share the fullest information on blue-chip stocks and provide the reasons why these stocks never lose their popularity.

What Are Blue-Chip Stocks?

Blue-chip stocks are giant companies that can boast an immaculate reputation they have been earning for years. The main distinctive features of such business entities are financial stability, a well-designed infrastructure, impressive earnings reports, and a solid history of sustained growth.

Blue-chip stocks manage colossal cash flows and usually have a market capitalization in billions of dollars, thus taking the leading positions in respective business sectors. It’s commonly believed that the name “blue chip” was derived from poker, as the most expensive chips were usually that color.

  • Paying dividends is not imperative for a blue-chip stock; however, most elite companies have long records of delighting their investors with stable or even rising consecutive annual dividends because dividends are a way of offsetting for investing money in a company.
  • A blue-chip stock often belongs to the group of the world’s biggest household names.
  • How big and well-established a company needs to be in order to qualify for blue-chip status is a debatable question. Most financial experts agree that a market cap of $5 billion is an acceptable benchmark.
  • An attractive blue-chip stock is typically a pillar of the most reliable and time-tested market indexes, e.g., the Dow Jones Industrial Average, the NASDAQ-100 in the US, the FTSE Index in the UK, or the TSX-60 in Canada.

All these facts make blue-chip stocks extremely popular among traders, who are attracted by the companies’ long-term strength and annual dividend payments. Boeing Co. and Procter & Gamble are the perfect examples of blue-chip stocks.

Blue-chip stocks: pros and cons

Pros Cons
High stability in times of crises Low volatility (price growth rate)
High capitalization of companies Suitable only for long-term trading strategies
Stable growth of prices and profits  
Ability to earn on price speculations  
Dividends are paid to shareholders  
Minimum risk of the drop in the stock prices  

What Makes Blue-Chip Stocks a Worthwhile Investment?

There is a broadly held belief among risk-averse investors that blue-chips can cope with severe market challenges of any kind. That’s partly true, but market fluctuations deprive you of a 100% guarantee. The feature of this large market is its volatility – such infamous stock sell-offs as Black Mondays and Black Thursdays speak for themselves. Blue-chip stocks are the least affected equities in times of such events.

Although blue-chip stocks have been proving their relative stability over decades, it’s crucial to diversify your portfolio beyond only one type of stock. Even with a list of companies you consider rock-solid, you shouldn’t invest exclusively in their stocks to make up the bulk of your portfolio.

Diversification is an essential investing technique that is applied to spread your money among various classes of stocks. Choose companies from contrasting industries and different geographical locations, and make sure your portfolio includes stocks with all types of market capitalization (small, medium, and large).

Needless to say, investing in a few blue-chip stocks is still a wise choice, as their reliability makes them nearly immune to market downturns.

How to Start Investing in Blue-Chip Stocks

Start investing in blue-chip stocks by simply adding them to your investment portfolio; this process can be organized through the help of a broker. This is what you need to do to start investing in a smart way:

  • Review the latest annual and quarterly reports published by the company to evaluate its performance. It’s also essential to familiarize yourself with any changes in the management of the entity.
  • Conduct thorough research of the stock’s performance for the last ten years to get the most precise statistics on the dividend payments trend and the revenue fluctuations. Analyzing a company’s activity over a long time period will shed some light on the global picture of its performance during both boom and bust cycles.
  • Analyze a bunch of premium stocks and make a choice in which of them to invest, based on the results of your research and personal investment preferences. The world’s most influential agencies recommend mitigating the potential risks through stock diversification, so the best option is to choose several blue-chip stocks to start with.

Investors can either buy or trade stocks through a brokerage.

1. Stock Investing 

Stocks can be bought individually or purchased as a basket of a diversified common stock fund when you invest in mutual or exchange-traded funds (ETFs). However, investing in funds assumes operating with considerable sums of money, which is not an option for everyone. If you decide to purchase stocks through a brokerage, there are several options available. Depending on your needs, you can choose a full-service broker, an online broker, or a discount broker.

2. Stock Trading

There is also a possibility to trade stocks. In this case, you don’t own the stocks, but you can trade on the fluctuations of their price same as on the FX market. Such investment products are known as stock CFDs, where CFD stands for “contracts for difference.” You can trade either stocks or indices, which are primarily composed of blue-chip stocks.

LiteForex offers a wide range of broker services, starting from the evaluation of a blue-chip stock’s performance against the goals of the preferable investment strategy and up to general advisory on how to perform your own research properly. LiteForex can guide you through the registration process and help make your first deposit. From that moment, you will be able to place orders and buy any stocks.

Trading can bring a higher profit than stock investing. Fluctuating dividend payments hide risks for investors.

Blue-Chip Stocks With Big Payouts

Most blue-chip shares supply their investors with consistent dividends without slippage, thus becoming a great addition to every investor’s portfolio. Profitability and dividend yields for some blue-chip stocks, such as, for example, Vodafone or Shell, are sometimes near historical highs. High dividend yields vary in percentage, but some of them can offer a solid figure of around 15%.

Investors often predict future blue-chip stock values, making their assumptions on the current situation with dividend payments. If the dividends paid by a company are high enough, it automatically means that the stock price will significantly increase in the next few years.

Blue-chip stocks’ long-lasting financial stability and high dividend payout ratios make them a tasty morsel for many investors. However, reviewing a company’s fundamentals before making a choice is still a good decision – make sure its financials seem optimistic.

World’s Most Wanted Blue-Chip Stocks

As it has already been mentioned, a blue-chip stock is generally a big household name. Even people who are far from investing and trading will instantly recognize a blue-chip company’s name. These companies produce the most demanded and appreciable products or services that are used by millions of people across the globe. Here is a sample list of a few of the best blue-chip stocks on the market:

Amazon (AMZN)

  • Market capitalization as of 2021: $1.07 trillion
  • Current price: $3 508.06

Founded in 1994 as an online bookshop, Amazon has transformed into a multinational tech company that is now a member of the Big Five, along with such industry giants as Google, Apple, Microsoft, and Facebook. Today, Amazon focuses not only on e-commerce but also on cloud computing and AI technologies. The versatile online store offers literally everything – from foodstuffs to various subscriptions.

 

Apple (AAPL)

  • Market capitalization as of 2021: $1.27 trillion
  • Current price: $154.39

As of 2021, Apple can boast the title of the world’s most valuable company. The company was founded in 1976, and the first product manufactured by it was an Apple I personal computer. From that moment on, Apple has been developing a wide range of top-notch devices, software, and cloud services. The most popular Apple product used by consumers from all around the world is the iPhone.

Facebook (FB)

  • Market capitalization as of 2021: $528 billion
  • Current price: $378.87

Facebook was founded in 2004 and acquired its blue-chip status only recently. This social media giant was first intended to be an online messaging platform used exclusively by Harvard students. Seventeen years later, it has transformed into a huge social network that serves as the main method of communication for more than 2.5 billion users.

Microsoft (MSFT)

  • Market capitalization as of 2021: $1.3 trillion
  • Current price: $302.51

Microsoft Corporation was born in 1975 when two childhood friends decided to make use of their programming skills to earn some money. A garage project has turned into a powerful company that is best known for inventing one of the most popular operating systems in the world. Other Microsoft products include MS Office and the well-known Internet Explorer browser. Despite the abundance of strong competitors, Microsoft still holds the title of the world’s biggest software producer.

3M (MMM)

  • Market capitalization as of 2021: $88 billion
  • Current price: $194.12

Founded in 1902, 3M has quickly become one of the most buoyant companies in the fields of industry, consumer goods, and healthcare. The company became a true healthcare giant and earned its blue-chip status in the second half of the 20th century. 3M is a valued producer of various goods: protective equipment, abrasives, adhesives, medical products, and many others.

Visa (V)

  • Market capitalization as of 2021: $409 billion
  • Current price: $229.95

Visa Inc. was founded in Fresno, California, in 1958. Today it is one of the most valuable companies in the world and controls electronic money transfers across all six continents. Obviously, the company specializes in financial services, and its most popular products include debit, credit, and prepaid cards.

Coca-Cola (KO)

  • Market capitalization as of 2021: $237 billion
  • Current price: $56.95

Founded in 1892, Coca-Cola has quickly become a beverage leader – and it’s all thanks to its namesake sugary soft drink. Marketed initially as a temperance drink used for medical purposes, it’s now one of the most recognizable sodas globally.

Johnson & Johnson (JNJ)

  • Market capitalization as of 2021: $374 billion
  • Current price: $174.81

J&J is a vast pharmaceutical business that was founded in New York in 1886. Today Johnson & Johnson develops and manufactures medical devices, pharmaceuticals (including vaccines), and consumer goods. It’s one of the few U.S. companies that have an excellent credit rating of AAA.

Merck (MRK)

Merck is a true healthcare giant, an American pharmaceutical company headquartered in New Jersey. It has been providing medical products and vaccines for the most fearsome diseases over the last 130 years. MRK is one of the few pharmaceutical stocks that are always in high demand among bullish investors.

Berkshire Hathaway (BRK.B)

Berkshire Hathaway stands alone on this list, as it’s not manufacturing but a holding company. This American company was founded in 1839 and is now owned by Warren Buffet, one of the most influential and successful investors. Buffet himself holds considerable shares in several blue-chip stocks, e.g., Apple and American Express.

Are Blue-Chip Stocks Really That Safe?

Summing up everything mentioned above, blue-chip stocks can be fairly considered safe investment instruments even on the choppy stock market. They have to be well-capitalized in order to join the elite blue-chip group, and that’s worth something. However, even a blue-chip stock might have a BBB-credit rating, and if it does, its safety and stability are called into question.

History speaks for itself. For instance, before the Great Recession, the lion’s share of investors considered General Motors (NYSE: GM) a blue-chip stock. It was well-capitalized, well-known, well-established – you can continue the list with any adjective that starts with “well.’” However, in 2008, the company’s financial situation sharply deteriorated, forcing GM to file for bankruptcy in 2009, causing huge losses for its investors.

Let’s consider a more recent case of General Electric (NYSE: GE), a company that was once the bluest of all blue chips. This industrial giant is not bankrupt yet, but its financial struggles have already turned it into a shadow of the former glorious entity. Trying to pay down debt, the company had to sell several businesses, which has significantly impaired the total value of GE.

Investing is always about risks, and even blue-chip stocks are not completely safe. However, they are indeed the safest investment tools presented on the stock market today.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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