Blue chip stock is something you may have heard of, but you may not be sure about what it is. You may also be wondering why it has the name blue chip stock, and what the advantages and risks are of blue-chip stock. If you’re thinking of investing in some, what do you need to consider? All these questions will be answered in this article.
What Are Blue Chip Stocks?
A blue chip is a stock in a company with a good reputation for operating efficiently and having the ability to do well financially through any economic conditions; through the good times, and the bad!
In the United States, the Dow Jones Industrial Average is used by most major companies to buy and sell stocks, and every company in the Dow Jones Industrial Average uses blue chips (although there are other companies that there are not in it that are blue chip too). It has been used to follow stock market shares for a long time, since 1928 in fact.
Why Are They Called Blue Chip Stocks?
Rather appropriately, the name originates from a game known for having an element of risk to it – from poker. In poker, there are blue, red and white chips, and normally blue-chips have the highest value.
The Advantages of Investing In Blue-Chip Stocks
The main advantage of investing in blue chip stocks is that they are pretty low risk. When the economy goes through a bad patch, blue chips can be seen as being relied upon because they are secure and stable. Even if blue chip stocks do experience a fall, investors don’t generally need to worry about them because normally they will recover. They’re like an old friend that you can always rely upon. My good ol’ mate the blue-chip stock!
Often dividends are paid out on blue-chip stocks because they don’t move in price very much, and so the dividends are offered as compensation. These dividends can help to protect investors against any negative effects which may arise from inflation, and also help to make money for their portfolio of shares.
The Disadvantages of Investing In Blue-Chip Stocks
Despite there being some plusses for investing in blue-chip stocks, there are also some things which you should consider. If they’re not quite disadvantages, they are certain things you should think about anyway.
One of the main advantages of stocks that are blue chips can also be a disadvantage. That is the fact that the stocks are from a large company with stability. Therefore, it is unlikely that the stocks will grow a huge amount. Companies like Apple and McDonalds are unlikely to grow spectacularly overnight. These companies have become successful generally through steady and stable growth over many years, decades, even. Of course, there are occasions, like new product launches, where this might happen, but it’s nevertheless very unlikely even with these that growth will be instantly spectacular. What’s more likely to happen is that they will stay steady.