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A blue-chip stock is one that is well-established, financially sound, and historically secure. Blue-chip companies are those that have a history of posting earnings and paying dividends, all while continuing to increase profits. While there will always be fluctuations in markets, and all companies go through occasional downturns, blue-chip companies are known for their strong executive management teams that make intelligent growth decisions, and for their high quality products and services.

Blue-chip stocks, which are also known as large cap stocks, (because they have a high market capitalization), tend to rise and fall in conjunction with the stock market in general. Because the return on blue-chip stocks is close to a sure thing, the stocks tend to be very expensive and have a low dividend yield. These drawbacks are more than offset by earnings and dividends paid. Most blue-chip stocks are offered by companies that have been around for decades, or even longer, but new companies can break into the blue-chip ranks if analysts expect the company to last. While some people still doubt the financial security of stocks, blue-chips are the closest thing you can find to a sure thing on the stock market.

As with any stock, there are positives and negatives with blue-chips. Because blue-chips are the oldest and best-known companies, they are easy to follow, often ending up on the front page instead of just in the financial section of the local newspaper. It is easy for investors to track these companies and evaluate their advertising and marketing strategies for themselves. Finally, they are a great tool for teaching kids about the stock market by using brand names they recognize.

The negatives associated with blue-chips are basically the same as for other stocks. Even blue-chips can take a nosedive, as every company makes a mistake at some point in its history. And as the old saying goes, the bigger they are, the harder they fall. The more you have invested in a company, the worse its mistakes can be for your portfolio. In addition, blue-chip stocks often have smaller dividends than even the 4 percent yield associated with income stocks. This puts off some investors.

Blue-chips can be purchased through brokers or online. The best time to buy blue-chip stocks is after a disappointing earnings report or after a particularly bad public relations blunder – the stock is sure to dip then, making it more likely that you will buy low and be able to sell high.

If you divide the company’s net assets by the number of shares it has outstanding, and the stock is selling for less than that number, consider buying because it is a very good value at that point. Also, try to avoid companies that have accrued a large amount of long-term debt.

Bernard Taiwo
I am Management strategist, Editor and Publisher.