Investing in Blue Chip Stocks

Investing in Blue Chip Stocks

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Investing in Blue Chip Stocks

Investing in Blue Chip Stocks may not have the attraction of a hot high-tech investment, but it can be highly rewarding, as good quality stocks have outperformed other investment classes over the long term.

Historically, investing in stocks that have generated a return, for a long time, between 12 and 15 per cent per annum, depending on how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the foundation of the corporate "food chain." First, companies have to pay their employees and suppliers. Then, they pay their bondholders. Following are the preferred shareholders. Businesses have an obligation to pay all these players first, and if there is leftover money is paid to shareholders through dividends or retained earnings. Sometimes there's a lot of money left for shareholders, and other cases, it is not. Thus, investing in shares is risky because investors never know exactly what they will receive for their investment.

What are the attractions of blue chip stocks?

The attractions of the Blue Chip stocks are

• Great long-term rates of return

• You become an owner of a company.

• Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.

Risks involved in Blue Chip Stocks

Some investors cannot tolerate the risks associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.

If you don't have time and skills to research a good quality company at a fair price, it is recommended not to invest directly. Instead, you should consider a good mutual fund for your investment.

Choosing a blue chip company is only half the battle - deciding the correct price is the other. Theoretically, the value of the stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this does not fully explain the reality. In reality, supply and demand for a stock determines the daily price of stock, and demand for a stock increases or decreases depending on the perspective of a business.

Thus, stock prices are driven by investors' expectations for more favorable expectations for improving the stock price. In short, the stock market is a voting machine and most of the time; it is based on the vote of investor fear or greed, and not on rational evaluation of their value. Stock prices can swing in the very short term, but they eventually converge to their intrinsic value in the long term.

Investors should consider the good companies with high expectations that are not yet embedded in the price of a stock.