What are Blue Chip shares?
Definition of blue chip stocks
Blue-chip stocks are well-known companies that generally have a track record of long-term success. A blue chip company tends to be a large and established leader in its industry and can also have significant consumer activity. This means that you may be familiar with the company from the use of its products or services, in addition to considering an investment in stocks.
What makes an action a first-rate action?
Because blue chip stocks are generally the most dominant names in their respective industries, there are a limited number of them. However, there is no official list of blue chip stocks or a formal arbiter that dictates which companies land the blue chip designation.
Instead, there are some key characteristics associated with these companies and therefore their actions:
- Sustained Success: A top-notch business has a proven track record, which often means it’s not going away anytime soon. The historical performance of its share price will show positive price appreciation over a long period of time. While blue chip companies are not immune to the ups and downs of the experiences of publicly traded companies, their ability to generate consistent profits through changes in leadership, technological disruption, and other winds. opposites is fairly constant.
- Large Size: Consistent profits over an extended period of time translates into formidable size. Blue-chip stocks tend to be companies with a “mega” market capitalization (eg, a market capitalization of $ 200 billion or more).
- Dividend Payments: The vast majority of blue chip stocks pay regular dividends to investors. There are a few exceptions to this rule, but many blue chip companies reward long-term investors with a steady and generally increasing stream of dividend payments over many years.
These three ingredients are attractive to any investor. However, a sports analogy can demonstrate the subjectivity involved in identifying top notch stocks. Many of professional sports’ most accomplished stars appeared on the blue chip lists before they turned pro, and they have proven to be worthy of the title. However, the other participants in these top notch rankings failed, whether due to injury or some other reason.
While investing, some companies may tick the boxes to belong to the coveted blue chip club for a period of time, only to fall out of favor. Consider Kodak, a company that was the undeniable leader in photography before filing for bankruptcy in 2012. (Kodak has since returned to Wall Street, but the company is nowhere near its previous level of dominance.) Or consider Sears, a trailblazer. of US retail. – the majority of its stores have closed and the company is trading at $ 0.15 per share (with a market cap of around $ 16 million) as of this writing. The lesson is simple: Being a top-notch stock isn’t a designation a company keeps forever.
Should you invest in blue chip stocks?
Despite the examples from Kodak and Sears, it’s important to note that blue-chip stocks can be the foundation of an investment portfolio. Some may still be growing while many others are very mature businesses. Even these slower-growing names can be attractive long-term investments, in part because of the dividends these companies often pay (as mentioned above).
If you’re trying to figure out whether to invest in blue-chip stocks, here’s something important to consider: You may have invested in those stocks before. If you invest in any type of general index fund, you probably already own a large number of stocks that are generally considered blue.
Examples of top-notch stocks
While this is by no means an exhaustive list of all the stocks that can be classified as top-notch, this sampling helps to show that top-notch stocks come from all industries.
Here are some examples of top-notch stocks.
- Home deposit
- Coca Cola
- Johnson & johnson
- Procter & Gamble
Alternatives to blue chip stocks
If you are new to investing and planning to buy blue chip stocks, you can reconsider your decision and invest in a larger, more diverse index instead. For example, the S&P 500 includes all of the big names in blue chips, while also including many other profitable and growing companies. By investing in a diversified index, you run less risk of the blue chip stock you choose becoming the next Sears when you don’t pay attention.
Larger index funds like the Russell 1000 include large companies like Amazon, Apple, and JPMorgan, as well as mid-cap companies that may be far from mature (growing faster but riskier as investments). ). These index funds offer the essential ingredient of diversification. Rather than tying your fortune to one or two large companies, your money has a chance to benefit a wide range of companies that sell and serve different market segments.