At the best of times, the market is volatile, at the worst of times it’s downright intimidating. So it’s important for investors to find balance somehow in this roller-coaster ride of ups and downs.
However, this is a task easier said than done! More so for stock market beginners! In fact many of us start investing in the markets with a lot of enthusiasm. And in this enthusiasm we end up making the wrong investment decisions. Result – we lose a ton of money and swear never to look at the stock markets.
So is there a way to reduce this risk and minimize the chances of going wrong in the early stages of your investment? The answer is an absolute Yes! One of the many ways to do this is by investing in blue chips.
So, what is a Blue-chip stock?
Blue chips are the sturdy few in a sea of investment options. Though thought to be boring and somewhat conservative, these are the companies which are always on top of their game.
The term blue chip originated from the game of poker, where the color blue stands for the highest denomination in chips. Likewise when it comes to stocks, the expression instantly brings to mind strong and large players in the stock arena, one which spells safety, quality and profits.
How to identify a Blue-Chip?
There is no set definition to classify a stock as a blue chip. Inclusion of a stock in the BSE Sensex may be considered as a step towards acquiring the blue chip status. However, blue chip shares will have most of the following characteristics:
- Blue chips boast a record of steady and high earnings over a relatively long period of time. These companies have the customers queuing up for their products regardless of the goings on in the economy.
- These companies are industry leaders and have a capability to maintain this status for the next ten years.
- The companies in question are usually extremely large and often have branches in a number of locations. The McDonalds chain is a great example of a brand which has fans in every country, while managing to cater to the varied tastes of its international consumers.
- Blue chip companies enjoy a distinct competitive advantage either due to the quality of their products or a strong distribution channel. They can also boast about a trustworthy management.
- A number of blue chip companies have a variety of products or services on offer. ITC is a perfect example. It has a range so diverse that it includes everything from cigarettes to hotels.
- The stellar financial reputation of these companies allows for a low debt, high credit ranking. This means they can borrow cash at a much lower rate than the rest of their adversaries.
- Earnings are usually paid to the stock holder in the tax-friendly form of dividends. As the profits of the company soar over the years, so too does the percentage of profit increase per share.
- These shares have high market capitalization and thus a higher liquidity, which means they can be bought and sold easily.
So is it a good time to invest in blue-chip stocks?
This is a good time as any to start investing in the stock markets especially if you are a first timer. With the world economy in shambles, government in a policy paralysis and other issues plaguing the country, the Indians stocks have been beaten down. As a result, most blue chips are also available at deep discounts.
Having said that there are chances that you may make more money by investing in mid or small cap stocks. After all these stocks have the potential of becoming the future blue chips! But again they may not. The point to be considered while investing is that the risk involved in these stocks is way higher than in blue chips.
By investing in Blue chip stocks, you will be in a win-win situation. Your risk will be minimum and by investing at a discount to its fair valuation, you can maximize your returns! After all, what would you prefer? Sifting through the entire coal mine or picking out the shining diamonds?
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