If you’ve considered investing in the stock market, you may have found yourself wondering how blue chip stocks can help you achieve your financial goals. Blue chip stocks get their name from poker—a game in which the blue chips are considered to be the most valuable.
When you invest in blue chip stocks, you are investing in companies that are already well-established. They have stable earnings, high credit ratings, and minimal liabilities. They also possess diversified product lines and a strong customer base.
The biggest advantage to blue chip stocks is that they are relatively safe, stable investments. When you purchase shares in a company such as Wal-Mart, Disney, McDonalds, Microsoft, or Coca-Cola, you can be fairly certain that you’ll receive a return on your investment. In fact, blue chips are considered to be almost a “sure thing” in the stock market. For this reason, these stocks are typically the preferred investment choice of retirees looking for a conservative way to plan for their futures as well as non-profit organizations that can’t afford to take a great financial risk.
Of course, the biggest disadvantage of owning blue chip stocks is their high price per share. This makes it a bit more difficult for small investors to base their portfolios on blue chips. Additionally, since these stocks are known for their relatively modest returns, you’ll lose the potential thrill of becoming an overnight millionaire and knowing that your support helped an unknown company rise to the top of its industry.
Blue chip stocks may also be sometimes referred to as bellwether stocks, although the two terms are not exactly interchangeable. A bellwether stock is stock from a company that is a leader in its industry and one that analysts turn to when predicting the performance of the industry at large. Since most industry leaders tend to be well-established companies, bellwether stocks are often also blue chip stocks. However, a blue chip stock is not necessarily a bellwether stock.
The Dow Jones Industrial Average is considered to be the most prominent listing of blue chip stocks in the world. Created by Dow Jones & Company founder and Wall Street Journal editor Charles Dow, this index of 30 stocks is often quoted by analysts to provide a picture of how the stock market is performing as a whole.
If you want to invest in blue chip stocks, you’ll need to purchase shares from a dividend reinvestment plan, a direct purchase stock plan, or a stock broker. Alternatively, you could choose to invest in a mutual fund that is comprised of various blue chip stocks—further reducing your risk.