INVESTING IN BLUE-CHIP STOCKS

What are Blue Chip Stocks?

The stocks of well-established companies, leading in their sector, with consistent profit growth over a long period and steady dividend payment are called "blue chip stocks". The term "blue chip" gets its name from the game of poker where a blue chip has the highest value. Similarly, the stocks of blue-chip companies are highly valued due to their consistent financial soundness. A regular dividend is expected from blue-chip stocks even in bad financial times in the stock market.

Blue chip stocks have a lot of prestige as an investment asset class. They are perceived to be the best stock for long-term investment. Blue-chip companies are the leaders in their sector, and are known for their sheer size and reputation - in products, services and company governance. Features of a Blue Chip Company Here are some aspects of a blue-chip company:

Leaders in their sectors, with significant competitive advantage. Steady earnings over a long period of time.

Large market capitalisation. High public confidence due the quality of its products and services. Ability to face both good and bad financial times, including recession.

Blue Chip Stocks Indices around the World Blue chip stock indices include a number of selected blue-chip companies. The indices provide cumulative data such as an index number as well as some individual data on the included companies. Stock market indices exist around the world, indicating top blue chip companies in each sector in their respective countries. Companies are included in a blue chip stock index based on the individual index's criteria.

Not only do some of these indices help in making individual investment decisions, but act as the "bellwether" of a nation's economy and an indicator of the value of its leading companies.

On investing decisions and deciding which stock pay dividends consistently, referring to the blue chip stock list in a blue chip stock index can help in deciding which blue chip stock to buy.

Some of the major blue chip stock market indices are:

Dow Jones Industrial Average or Dow - The Dow Jones index includes 30 top blue chip stocks companies based in the United States (US). Some of the blue chip companies listed in the Dow are: o o o o o

Wal-mart (Retail sector) IBM (Computers and technology) Intel (Semiconductors) Coca Cola (Beverages) Boeing (Aerospace)

Standard & Poor's (S& P) 500 - According to its website, S & P 500 is "widely regarded as the best single gauge of the large cap U.S. equities market...the index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities." A subset of this list is the S&P 100, which includes 100 blue chip companies from this list.

Some of the top blue chip companies in S&P 500 are (July 2010):
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Exxon Mobil (Energy sector)

o o o o

Apple Inc. (Information Technology) Microsoft Corp (IT) Procter & Gamble (Consumer & staples) Johnson and Johnson (Healthcare)

Bombay Stock Exchange (BSE) Sensex - This index includes 30 top Indian blue-chip companies from important sectors in India. Some companies included are: o o o o o

Reliance Industries Limited (Oil & Gas sector) Infosys Technologies Limited (IT) ICICI Bank (Finance) NTPC (Power) HDFC (Finance)

Why Invest in Blue Chip Stocks Here are some advantages of investing in blue chip stocks:

The main reason why blue chip shares are much sought after is due to the perception of safety. Blue chip stocks are perceived to be less risky than small caps stocks.

The preference for quality among investors is another reason that blue chip stocks are valued. High value blue chip stocks are said to be worth possessing for long-term investment purposes.

The prospect of steady dividends, irrespective of market conditions, is a factor of attraction in blue chip stock for investors. They are a preferred choice for those seeking recession-proof investment and are considered to be great dividend stocks.

A stock portfolio should consist of a mixed bag of investments there should be diversity in assets. Instead of putting all eggs in one basket, it is better to diversify and dedicate a percentage to large-caps or blue chip stocks, and the rest to other asset classes. This would create a balance between stability and risk in a stock portfolio.

Buying Blue Chip Stocks Blue chip stocks can be purchased by:

Utilising the services of a stockbroker and brokerage firms - some investment companies offer specialised blue chip stock portfolio packages with emphasis on high dividend growth or alternatively with priority on stability.

Investing in a blue chip mutual fund offered by financial service providers. This further reduces the element of risk as all investment decisions are made by the fund manager.

Blue Chip Shares - Some Disadvantages The share market is prone to ups and downs. Blue chip stocks are not immune to those fluctuations, although they are in a better position to weather any financial storms and pay consistent dividends.

As lot of investors flock to blue chip stocks as to a refuge of stability, the dividend returns from such stocks tend to be lower, although consistent. Warren Buffet - a Successful Blue Chip Investor Warren buffet is a billionaire American investor who invested in blue chip stocks to great success. He believes in investing in solid, reputed companies having competitive advantage and is an advocate for longterm investment in blue chip stocks.

Stock market investors would do well to take a feather out of Warren Buffet's cap and include blue chip stocks in their stock portfolios.