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When you're first getting started in your investing journey, you'll realize there's a lot to learn about. That's why you might decide to start that journey in one of the most common (and popular) ways: by purchasing stocks. But until you get a good handle on how the stock market works and what it feels like to see your stocks soar and dip in value, you may be slightly apprehensive about taking risks with your money. Almost all types of investments come with some level of risk — but there can be ways to mitigate those risks. When it comes to stocks, you might opt to purchase lower-risk blue-chip stocks as you work to build more confidence in your investing skills.
Blue-chip stocks can be ideal for beginning investors, but they do have their fair share of downsides you'll want to consider before you call your broker or open your favorite trading app. To get started, take a closer look at blue-chip stocks, including what they are and whether they're an ideal choice for your investment style and goals.
They might sound like something special you'd find on a casino table in Las Vegas, but blue-chip stocks aren't quite so much of a gamble. When someone uses the term "blue-chip stock," they're referring to the stock of a large company that's very well-established and has a solid reputation for quality and reliability. These aren't just companies that have been around for a long time, but are those that have become some of the largest and strongest in the country.
As a result, you'll often recognize the companies whose stocks are considered blue-chips, as they tend to be popular household names. Examples include companies like:
- Apple (NASDAQ: AAPL)
- Disney (NYSE: DIS)
- Home Depot (NYSE: HD)
- Microsoft (NASDAQ: MSFT)
- Nike (NYSE: NKE)
Characteristics of Blue-Chip Stocks
While you'll likely recognize the names of the companies behind many blue-chips, reputation alone doesn't qualify a stock for blue-chip status. There are other specific characteristics blue-chip stocks tend to share — particularly the following:
- Large Market Capitalization: Blue-chips tend to be what investors often refer to as "large-cap" stocks. But to understand what that means or why it's significant, we first need to look at the definition of market capitalization. Market capitalization, or market cap, refers to the worth of a company's stock as determined by the stock market. To find a company's market cap, you multiply the value of a single share of the company's stock by the total number of shares held by investors. For instance, say that company ABC sold 10,000 shares on the stock market and that each share is currently worth $10. ABC's market cap would be 10,000 x $10, or $100,000. In order to be considered large-cap, a stock's market cap must be valued at $10 billion or more.
- Reliable History of Growth: Because blue-chip stocks are offered by some of the most successful companies in the country, they tend to be incredibly popular. The more people invest in them, the more their values grow. Due to their reliability, the odds are relatively slim that any of these companies will experience a steep decline in value overnight. While all stocks experience ups and downs, blue-chips are among the safest bets for long-term growth.
- Dividend Payments: Before we get into dividends, it's important to note that not all blue-chip stocks pay them — but many do. When a company becomes successful enough, it's able to make regular payments to shareholders from its revenue. These payments are called dividends and are paid out to each investor for each share they hold in the company. Some investing funds that hold a large number of such a company's shares can earn a hefty payout on dividends alone. That's why stocks that tend to pay out respectable dividend yields are often referred to as high-dividend stocks.
Investing in Blue-Chip Stocks
If blue-chip stocks offer all these benefits, why doesn't everyone invest in them? While plenty of people certainly do, it's worth considering the pros and cons before maxing out your portfolio with blue-chips alone.
The pros of blue-chip stocks lie in the fact that these financial tools represent well-established, popular companies. Because the companies have solid track records when it comes to earnings, performance and growth, investing in their stocks tends to be a safer bet when it comes to mitigating the risk of losing money and enjoying long-term growth.
One of blue-chip stocks' potential downsides is that long-term growth requires long-term holding. Blue-chips aren't the kind of stocks that are going to skyrocket up in value overnight; they're typically stable, but they're more the kind of investment that offers a slow and steady build. The only way to make a great deal of money off of them in the short run is to own a large number of shares, which can get expensive quickly.
That said, holding them for the long term may be no problem if you're planning to be a long-term investor. But blue-chips may not be the route for you if you're more of a day or swing trader. Day and swing traders aim to make money from riding the short-term waves of more volatile stocks, which move up and down in value much more frequently than blue-chips. Their aim is to "beat the market" or enjoy a better return than the market at large, which is much less likely to happen when you invest in the established, often less innovative companies that offer blue-chip stocks.
How to Choose Blue-Chip Stocks
There are a few different routes to go when it comes to investing in blue-chip stocks. The first (and easiest) is to invest in a blue-chip index fund or exchange-traded fund (ETF). Think of this option as buying a small amount of each of a collection of blue-chip stocks. This is a great option if you're a newer investor or don't have a great deal of time to research.
The other option is to invest in individual stocks. But how do you know which blue-chip stocks to chose? This is where you'll need to spend some time researching. Head over to a site like IBD or Yahoo! Finance where you can see a breakdown of each stock's information. These days, many online brokers, such as Webull or TDAmeritrade, also offer this information on their trading platforms.
Try to answer the following questions as you research:
- Does the stock offer dividends? If so, how much do they pay and how often do they pay out?
- Has the company enjoyed healthy earnings over the past few quarters? Are earnings accelerating or starting to go down over the previous few quarters and over the past few years?
- Does the stock's chart appear to be accelerating in a healthy upward pattern, or has it been trading sideways for some time?
- How volatile does the stock appear to be? Should you buy now or wait until the price dips?
It's also a good idea to look into any trending news about the company. Is it about to launch a hot new product that could be a potential gamechanger and drive the stock's price up? Or has it been the subject of a scandal that could potentially drive the stock price down? The most important thing is to do your due diligence when looking into each stock and find the ones that best fit your investing style.
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