Do You Know What a Blue Chip Stock Is?

Do You Know What a Blue Chip Stock Is?

Have you heard the term, “blue chip stocks” and didn’t know what that meant? One of my readers says yes to this question. She wrote to me and said that she had heard this term over her years but didn’t understand what it was or why it was important. Many people don’t know what this means or more importantly, why it is important.

Doesn’t it always seem to be that way? We hear all of these various terms when we are trying to do the right things with our money but it would take a lot of work to know all of the Wall St. terms. Blue chip stocks are what are considered to be the best of the best in quality. They are the name brand stocks. If you wanted a blue chip shoe, you may by a snazzy looking pair of Nike. If you wanted to buy a blue chip TV, you might buy a Sony.

How do you spot a blue chip stock? The easiest way (although not quite this easy) is to the look at the Dow Jones Industrial Average. What you will find when you look at the Dow Jones are 30 stocks, most fitting what we are looking for if we want a portfolio of blue chip stocks. In fact, the Dow Jones is often called the blue chip index so you can feel pretty good about finding blue chip stocks in this index.

Be warned, though. Just because it’s a member of this elite group of 30 stocks, that doesn’t mean it’s the best of the best. General Motors was a member of the Dow Jones until the day it went bankrupt. Make sure you do your research. Don’t take somebody else’s word for it.

What are we looking for in these stocks? First, they have a great looking balance sheet. More assets than liabilities. If, at your home, you spend more money than you make and your credit card balance is going up faster than a hot air balloon, your balance sheet is not good. (many households are in this position) If your home were a stock, you wouldn’t be a blue chip stock. Keep in mind that analyzing the balance sheet of a company is a little more complicated than this simple example.

Next, it pays a dividend. When you put money in to a savings account at your local bank, they pay you a dividend. In this case, your dividend is interest. Finally, these stocks normally move at nearly the same rate as the S&P 500. This is a collection of 500 stocks that is largely followed as a picture of how the market is doing. When a stock moves in the same direction and rate as the S&P 500, it’s a very safe stock.

Now, why is it important to know about these stocks? If you’re somebody who doesn’t have a lot of time to tend to your investments, you want safe investments in established companies. If you believe the many who say that owning a stock where you’re trying to lock in shorter term gains, if will take one hour of research per week per stock. That’s a lot of work for somebody with a full time job outside of the investment industry. Blue chip stocks can be left alone (for the most part) for a few years without a large amount of research.

Now that you know what blue chip stocks, you can easily find those stocks. Look first at the Dow Jones Industrial Average.

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