A blue chip stock provides stable earnings to the investor and has no extensive liabilities.The term is derived from poker, where blue chips are considered the most expensive chips.
3rd September 2013
Vietnam’s benchmark VN Index lost 0.64 percent to 487.4 points by mid day, tracking falls on regional markets as foreign investors sold blue chips, analysts said. Shares in Vietnam’s two biggest companies by capitalisation led the fall; with Petro Vietnam Gas dipping 0.73 percent and dairy product company Vinamilk falling by 0.71 percent. What is a blue chip stock and how does why is it regarded highly in the market? and why it is safer to invest in blue chip stocks?
Investopedia defines blue chip stocks as “ Stock of a large well established and financially sound company that has operated for many years. A blue chip stock typically has market capitalization in the billions, generally the market leader or the top three companies in its sector, and is more often known by most of the investors. While dividend payments are not necessary for a stock to be considered as a blue chip, most blue chips have a record of paying stable or rising dividends for year, if not decades. The term is derived from poker, where blue chips are considered the most expensive chips”
- A blue chip stock provides stable earnings to the investor and has no extensive liabilities. These stocks are valued by investors seeking relative safety and stability, though their price per share is high, many blue chip stocks are components of popular indices such as Dow Jones Industrial Average and the S&P 500. Generally companies which offer the following returns on their stocks are classified as blue chip stocks:
- Membership in the S&P 500
- Market Capitalization of more than $ 10 billion
- Dividend yield of more than 2.8% over the last five years
- Expected growth of Earnings per Share of more than 5 percent over the next five years
- Interest coverage greater than or equal to 4.0
However, it must be noted here that these are the assumptions for the stock to be considered as a blue chip and there is no formal requirement for being a blue chip stock. Some of the popular blue chip stocks are Microsoft (Nasdaq: MSFT) and Wal Mart ( NYSE: WMT).
Difference between Blue Chip and Penny Stocks?
A penny stock is technically any stock that has a share price of $ 1.00, however, the term applies to any thinly traded and low priced stocks. The Securities and Exchange Commission (SEC) define penny stock as shares which are priced below $ 5. Penny stocks lack liquidity and investors will find it difficult to buy or sell, this lack of liquidity is exploited by some traders who try to influence the prices of these stocks. Penny stocks are highly speculative and the companies rely on speculative buying rather than market value. Blue chips have no speculative value and have high market value. Penny stocks are perceived potential stocks with chances of price explosion. Blue chips are relatively safer with lesser chances of a price explosion. Penny stocks have lesser visibility compared to the Blue chips and can be researched if Leeds analysis is applied. Blue chips stocks are heavily followed companies having a wealth of information. Penny stocks have a larger spread blue chip stocks have little spread between the bid and offer prices. Penny stocks can rarely pay dividends but blue chip companies pay dividend regularly.