By Arjun Chandrasekar.
The term “blue chip stock” comes from the popular game of Poker, in which each chip has a color, signifying its value. Whites are worth $1, reds are worth $5, and blues are worth $10, indicating that blue chips are much higher in value compared to the others. Blue chip stocks are essentially popular companies which many investors buy into due to their name-brand and continued profit. Although there aren’t any official rules for what threshold stocks have to surpass to be considered blue chip, some common attributes of these stocks are that they have a market capitalization of over $5 billion, have been in the industry for an extended period of time, and have paid dividends on a consistent basis. Usually they’re placed in popular market indexes such as the S&P 500, Dow Jones Industrial, or NASDAQ. Investors trust that the money they put into these stocks will be worthwhile, as that has been the case for a long time. Many beginner investors generally buy into blue chip stocks because they’ve heard of others doing so and have some knowledge of the company. However, they might develop tunnel vision on these big name stocks, which goes against the idea of diversifying their portfolio in order to maximize returns.
Blue chip stocks are generally known to be safe and profitable investments. Even during market downturns, they will bring you large amounts of profit. This is mainly due to the fact that they are trusted by millions and have a long standing reputation to back them up. Some of the advantages in buying these stocks include great financial performance, high-paying dividends, low risk, low volatility, and steady profitability. The down side, however, includes lower returns, slow capital gain, and sometimes low dividend yields. For a beginner investor, however, the advantages far outweigh the drawbacks.
Some of the popular blue chip stocks include Johnson & Johnson, Berkshire Hathaway, and Walt Disney Co. These are all household names within their industries, and have a large influence over industry practices. One indication of their great reputation is…you! If you were able to recognize all of those names, this is a strong indication of their marketing practices and impact upon daily life. Below we have compiled a set of numerical data that we will be using to describe each blue chip stock. Examples include: price per share which is the value of 1 share in the company, the market capitalization which refers to the total value of all the company’s shares, and the PE (price to earnings) ratio which is the share price divided by the earnings per share. The statistics given below are up to date for March 2021.
Johnson & Johnson
Market Cap: $425B
PE Ratio: 29.34
Market Cap: $577B
PE Ratio: 14.30
Walt Disney Co
Market Cap: $337B
PE Ratio: 32.60
In short, blue chip stocks have maintained a reputable image in the open market for an extended period of time, thus leading many investors to pour their money into them. By investing in these stocks, you get access to a growing, profitable company with a strong resistance to practically any market downturn. These stocks generate steady income over longer periods of time and are a safe gamble for beginner investors. Nevertheless, it remains of utmost importance to diversify your portfolio into other types of assets such as mutual funds, ETFs, options, etc.
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