Stocks are essentially ownership in a company – the more shares of stock you own, the larger your share in the company. Companies sell stock to raise money for the company’s operations. Investors make money from stocks by selling shares at a higher price than what they were purchased for or from the dividends the issuing company pays periodically.
Just like there are all different kinds of companies – large, small, seasonal, and in different sectors – there are different stocks. Blue chip stocks are considered some of the best and most stable stocks to invest in. They’re called blue chip stocks because once upon a time, the blue chip was the highest-valued poker chip. These bellwether companies represent the highest of quality and value—blue chips.
Blue chip stocks are sold for solid companies that are well-established and financially sound. These companies have a long record of stability and growth and can generate profit even when the economy is unfavorable. Blue chip stocks are less risky than stocks from smaller companies. They have a low debt to equity ratio and consistently pay dividends. The companies sell high-quality products and services that are widely accepted.
The Dow Jones Industrial Average follows the average value of 30 blue chip stocks from various industries. General Electric is the only stock that’s remained on the list since its inception in 1896. The list is continually updated so that the best companies remain on the list. Companies on the list include 3M, American Express, Coca Cola, General Motors, Hewlett-Packard, Johnson & Johnson, Microsoft, Wal-Mart Stores, and Disney. If you pay close attention to the types of companies on the list, you’ll see these are companies that are well-established, they have products and services that are widely accepted, and have reliable growth. You won’t often see any new companies on the list, even if they’ve been popular for the past few years.
Blue chip stocks often have a large market capitalization and many of them also qualify as large cap stocks – stocks that have more than $10 billion market capitalization. However, not all large cap stocks are blue chip stocks and not all blue chip stocks are large cap stocks.
Because these are strong stocks, almost every portfolio would benefit from having a few of these. If you’ve never purchased stocks before, you can buy blue chip stocks from a broker: a full-service broker who charges commissions on your purchase, a discount broker who charges a fixed amount for a certain number of trades, or from an online broker who charges a low fee for each
Their reliability makes a blue chip stock a good option for risk averse investors who want to receive a steady, reliable income. These stock prices won’t fluctuate widely, so investors do better to hold these for a long time.
You can also choose the price at which you want to purchase your stock by using stop and limit orders. With a stop order, you tell your broker to make your trade when the stock reaches a certain price. Note that your order will be put through even if the stock price rises after the order is made. A limit order tells your broker to make your trade for a certain price or better, if that price is available. You can also use these stop and limit orders to tell your broker to sell stocks if the prices reach a certain stop.
Blue chip stocks can sometimes become victims of a bear market. For example, at one point in 2007, Citigroup stock was priced at almost $550. Two years later, it dropped to $10 a share. It’s yet to recover to its glory days, trading at under $30 in late 2011. Those low points may be a good time to invest in a blue chip stock – if the price comes back up, your investment can increase exponentially.