What are Blue Chip Stocks?

Although used more frequently by investors than ever before, the term blue-chip traces its origins to the game of poker. You see, in poker, the standard game has three coloured chips; white, red and blue, with white being the least valued, followed by red and then blue.

While investing is wrongly compared to gambling, this one link remains. Blue-chip is a name given to a stock that belongs to companies that are considered safe and financially strong, as they have strong fundamentals, profitable growth, and increasing revenue consistently over the years.

Today’s article is not a list of blue-chip stocks; you have seen plenty of those. Today we learn about the basics of blue-chip stocks so you can select some for your portfolio on your own.

What is a Blue chip stock?

A blue-chip company is an established and financially sound company with a long history of profitability and a solid financial position. These companies have strong fundamentals, growing YoY and revenue.

They are very well-managed with their focus on generating shareholder value through dividends. With that being said, here are three top blue-chip stocks: Apple Inc., Google Inc., and Microsoft Corporation. Each one has a high blue-chip share price and will make you money as they are proven winners.

If you want to invest in blue-chip stocks, these three might be worth consideration. There are many more blue-chip companies; some are even domestic, so keep looking until you find ones that fit your criteria. Once you start investing, it is vital to continue tracking how they are doing and make changes accordingly.

Why Are They Considered A Safe Bet?

Investors consider blue-chip companies safe bets because they have strong fundamentals, growing YoY, and revenue. These companies have a steady graph and have consistently bounced back to their levels if they see a dip.

Some more recent blue-chip stocks include Facebook Inc. (now Meta), Netflix Inc., Alphabet Inc., Amazon Com Inc. Etc.

As we had previously discussed on our list of top blue-chip stocks, these companies show promising trends that, if seen early enough, pose massive potential for profits to be made. Blue-chip shares are considered essential components of any successful portfolio as they provide high levels of income with low risks when compared to other options available.

The blue-chip share price has risen steadily over time and has proven to be one of the best long-term investments. The blue-chip stocks also pay dividends at regular intervals, which can act as your secondary source of income or investment capital.

What Makes A Stable Graph?

The graph of a blue-chip company is generally stable as it is not very prone to sudden fluctuations in its prices. This, of course, gives an investor much confidence to invest and rely on these companies. A good blue-chip company will be able to withstand economic cycles and any negative media related to them.

These companies are leaders in their fields, and most investors buy into them because they feel that investing in such companies is much safer than predicting if other shares will go up or down.

Blue-chip stocks can also be considered safe investments for youngsters who are just beginning to invest for retirement or people who do not have the risk appetite for start-ups or new business endeavours. Another reason why investors prefer blue-chip stocks is because of their liquidity.

Investors know that they can easily sell off their blue-chip shares should they need to, so there’s no worry about being stuck with something you don’t want.

Also, blue-chip stocks usually have a higher dividend yield than smaller companies. Blue-chip stocks offer stability and security, making them great long term investments!

How to select good Blue chip stocks?

With a blue-chip stock, you can be sure that a company is doing better than most. When an investor hears blue-chip, there is safety in knowing that these companies are sound and growing.

These stocks are usually considered safe and secure long-term investments; they tend to perform well no matter what is going on in current business cycles, as they have proven their strength with investors over time.

A blue-chip share gives investors peace of mind knowing their money is safe, providing a buffer if the markets see ups and downs. There will always be risk when investing in stocks, but blue-chip stocks make up for that, with growth opportunities seen only at larger companies.

What should one look for when investing In such companies?

Let’s look at some blue-chip companies. Everyone dreams of having a winning portfolio, but very few people understand what it takes to achieve one. A winning portfolio has a mix of blue-chip stocks.

Still, other aspects should be considered when creating your portfolio, such as diversification, concentration of risk, and even taxes.

Most people invest in these companies without realizing how well they have been doing historically. The S&P 500 (SPX) is an index comprising 500 large-cap common stocks chosen to reflect the industries in which U.S.-based investors tend to be most interested.

For the Indian stock market, the Nifty 50 serves a similar purpose by listing 50 large-cap shares with low risk due to their market leadership.

More examples of Blue chip companies

According to Forbes, Exxon Mobil and Chevron Corporations could be considered among these best blue chips. Google is also included in several blue-chip stocks list since its price rose above $600 per share in 2010, and some believe that Google will continue to trend upwards because of what seems like an infinite market for search.

Blue-chip companies demonstrate a strong competitive position within their industry, have numerous brand name products or services and are financially sound with plenty of cash on hand, which can either be paid out as dividend payments or used for acquisitions to increase revenue, profits and market share.

Companies such as Coca-Cola, Nike and Hewlett-Packard fit into most blue-chip stocks lists due to their strong balance sheets and established track records for creating shareholder value.

These companies have maintained steady growth over long periods through strategic business decisions, including capital investments in R&D, mergers & acquisitions or expansion into new markets through joint ventures.

To be classified as a blue-chip stock, a company must sustain an earnings growth rate higher than 10% year after year while paying dividends consistently throughout all economic cycles.

To further qualify as one of these best blue chips on Wall Street, companies must demonstrate their financial strength by reporting consistent positive operating income without incurring debt during economic downturns.

Conclusion

Investing in blue-chip share price is one of the easiest and surest ways to multiply your money over time. A blue-chip share is a good investment if you plan on holding it for more than 12 months. The trick, however, is to buy at an optimum time so that you can see significant gains!

This often happens after bad news or analysts’ forecasts are out of favour or expectation. Look out for dips in blue-chip share prices when they happen, and make sure you jump into action quickly.

*Disclaimer: The stock(s) discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.