Chances are, if you’ve been taking part in the investing game, the term, “blue-chip stocks” will sound familiar. These types of stocks have been known for being a reliable investment.
But why invest in them? Are they good investments? And what exactly is a blue-chip stock?
We will explain what a blue-chip stock is and discuss some pros and cons to investing in them.
What is a blue-chip stock?
It is a well-established company with a great reputation for gains. Given its good reputation, this company has been around for many years, has dependable earnings, tends to show resiliency when the markets take a dip, although that is not always the case, and can even pay dividends to investors.
Not to mention, this company is probably well known, and it probably trades on the S&P 500 or the Dow 30. Some examples include Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Microsoft (NDAQ:MSFT), McDonald’s (NYSE:MCD), Royal Bank of Canada (TSX:RY), American Express (NYSE:AXP), Disney (NYSE:DIS), Target (NYSE:TGT) and Starbucks (NDAQ:SBUX).
As far as how financially big a company has to be to qualify as a blue-chip stock, that is out for debate. But a general benchmark is a market capitalization of around $10 billion.
As you can tell, the companies we just mentioned show consistency with solid fundamentals and are usually top of their game in their given sector.
To throw out a blanket statement, saying this stock is a good investment is not necessarily true for everyone. Being a good investment will depend on each investor’s financial needs, goals, risk tolerance and the way one likes to invest.
With that said, adding blue-chip stocks to the portfolio can help balance ups and downs from other stocks not otherwise in this category.
Advantages of blue-chip stocks
- One positive is they tend to be a low-risk investment as they have a track record with a reliable cash flow and are known for paying their debts.
- Blue chip companies are also reliable when it comes to returns.
- Stocks can also involve less effort to manage as they have lower volatility.
Disadvantages of blue-chip stocks
- On the other hand, although returns are reliable, they tend to be lower.
- Not to mention they tend to be expensive to purchase because they are in high demand.
- And lastly, there is usually less room to see growth over a short period of time.
As mentioned in other videos such as “Eight books to help you find financial freedom” and “Five emerging electric car companies to invest in today,” it is essential to speak to a financial advisor to help guide the decision-making process, allowing you to choose the best options for your given circumstances.
Because blue-chip stocks are big players that have been around for their fair share of market ups and downs, it does not make them exempt from market turndowns entirely. So, take special care and consideration before investing your money.
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