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Financial Literacy

Blue Chip Stocks | A Complete Guide to Investing

Blue chip stocks are often a great place to start when you are looking for stocks to invest in. Many of them represent famous companies like Coca-Cola (NYSE: KO)Johnson & Johnson (NYSE: JNJ) and Facebook (Nasdaq: FB).

But what exactly are blue chip stocks? How do you recognize one when you see one? What are the advantages and disadvantages of buying them? And how do you know which ones you should purchase?

In this article, we’ll walk you through each of these questions. By the end, you’ll have a solid understanding of blue chip stocks. Plus, you’ll find resources to help you understand them in even more depth.

Blue poker chips and a stack of money representing blue chip stocks.

What Are Blue Chip Stocks?

Blue chip stocks represent large national companies with big reputations and histories of stability, reliability and profitability. If you think of the most famous companies in the country or the world, you’re likely thinking of several blue chips.

Because they generally represent major corporations, blue chip stocks tend to be large cap companies – stocks that have market capitalizations of more than $10 billion. You can calculate a company’s market capitalization by multiplying its total shares outstanding by its current share price.

And because they have a long history of stability, blue chips aren’t fly-by-night companies or new startups. These are companies that have been around the block, often for decades or even more than a century!

As a result, they’re not the kinds of companies that are likely to go out of business overnight. While companies like these do go out of business occasionally, most of them have shown over the years that they are reliable and should be around for a long time to come.

Finally, blue chips have also shown a history of financial performance by generating revenues, earning profits and increasing their shareholder value over a long period of time.

How Can You Buy Them?

Generally, you can buy blue chip stocks the same way you buy most others. To start, you can have a financial advisor who trades for you, or you can open up a personal account on a trading platform like Schwab or Robinhood.

Once you open up your trading profile, you’ll need to fund your account. Now, if you’re new to stock trading, you may want to experiment with just a little bit of money to start. You can always increase as you learn.

The next step in buying blue chip stocks is to learn how to identify them. As I mentioned above, here are some of the characteristics to look for when you’re interested in buying blue chips:

  • Companies that are household names
  • Large, national brands
  • Inclusion on indexes like the S&P 500 or the Dow Jones
  • A history of stability
  • Reliability
  • A long pattern of financial success

My colleague Corey Mann has also put together a list of blue chip stocks that may interest you. As you go through the list, see which companies you gravitate toward and then do more research to decide if you want to buy them. We also have a resource that explains how to buy blue chip stocks in more depth.

Should You Invest in Blue Chips?

You may be wondering if you should invest in blue chip stocks. The answer is yes, you probably should invest in some. But don’t forget, you also need to be aware that there are some advantages and disadvantages to investing in them.

There are a number of different benefits of blue chip stocks. For example, blue chips tend to be drivers of overall market returns. Because they are such large and prominent companies, they greatly influence when the indexes show significant movement. Since the overall markets have achieved an annual return of around 10% over many decades, a lot of this return is due to the blue chips.

Another major benefit of blue chip stocks is that they often pay a steady and growing dividend. In particular, high-dividend blue chip stocks can be a great source of passive income for investors. Many of these companies even fall into the category of dividend aristocrats, which have grown their dividends annually over several decades.

On the other hand, you also need to be aware of the disadvantages of blue chip stocks. For example, because these are generally large, stable companies that pay out solid dividends, there is less of a focus on growth. As a result, you may not see the kind of returns on your investment that you would find with small cap high-growth stocks.

But every investment decision will have pros and cons. And despite blue chip stocks having some disadvantages, it’s generally worth having a number of them in your portfolio. They will help add some stability, quality and dividend yield to your overall portfolio, and they can even help you outperform the overall market over time.

Which Ones Should You Buy?

After reading up and doing your research, let’s say you decide to buy some blue chip stocks for your portfolio. The question then becomes which ones you should buy. Well, there are a number of steps you can take to identify which ones are right for you.

To start with, make a list of blue chip stocks and identify ones that may interest you. Perhaps some of them are in an industry you know well or represent famous companies you happen to like.

Then you’ll need to do an analysis of the individual stocks. Don’t just look at the history of the stock price. Instead, dive deeper into the company’s financials and make sure it’s generating revenue growth, profit growth and a healthy return on investment over time. If the company isn’t doing those things, you’ll want to dive deeper into whether there may be some mitigating factors that still make this stock a worthy investment.

Once you have identified the best blue chips stocks for your portfolio, you can log in to your trading platform and buy shares. Track your performance over time and watch your profits soar!

Concluding Thoughts on Blue Chip Stocks

Generally, blue chip stocks are an essential part of any healthy stock portfolio. While your largest returns may come from small cap high-growth stocks, blue chip stocks will help you diversify your portfolio and provide you with quality, stability and performance over time.

If you are interested in the latest news and views on blue chip stocks, make sure to subscribe to our free Investment U e-letter by entering your email in the subscription box below.


About

Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.

He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.

His primary interests at Investment U include personal finance, debt, tech stocks and more.

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