Most investors viewblue chip stocks as an elite group. They're the best-known, best-established, and best-capitalized publicly traded companies in the world. Because of that, they should have no problem enduring an inevitable economic downturn. Thus, many investors view blue chip stocks as being among the safest investment options in the stock market.
However, that might be a bit of a misconception because safety in the stock market can mean different things to different investors. Here's a look at how most investors define that term and how this relates to the way we generally view blue chip stocks.
What constitutes a "safe" stock?
What constitutes a "safe" stock?
Investors don't always agree on the definition of a safe stock. Some hold them to a high standard, deeming stocks safe if they are unlikely to lose much value during a market sell-off. Meanwhile, those focused on income would define a safe stock as one unlikely to reduce or suspend its dividend even during a deep bear market.
However, generally speaking, most investors would define a safe stock as one that's unlikely to produce a permanent investment loss. For example, it has the financial means to weather a significant economic or business shock without needing to sell a considerable amount of equity or assets at the bottom of the market cycle to survive. Thus, while its share price might decline during the turmoil, it stands a good chance of rebounding in the eventual recovery.
Stock Market Correction
A drop of between 10% and 20% in a major market index.
How to measure a blue chip stock's safety
How to measure a blue chip stock's safety
One factor that increases the probability that a company won't suffer a permanent loss is good capitalization. Good indicators include a large market capitalization -- typically more than $100 billion for a blue chip -- and a strong balance sheet (usually marked by an investment-grade bond rating).
Investors see companies with a large market cap as safer because their shares usually have lots ofmarket liquidity, meaning a significant dollar value regularly changes hands on a major exchange. That typically prevents a dramatic share price decline during periods of market turmoil when there are fewer buyers and sellers. Another reason large market capitalization stocks are safer is that they can more easily sell shares when they need to raise cash without significantly diluting existing investors. For example, a $1 billion stock sale from a $100 billion company would dilute existing investors by only 1%, whereas it would be 10% dilutive for a company with a $10 billion market cap.
Meanwhile, bond ratings can help investors gauge safety because they evaluate a company's ability to repay its debt and meet its financial commitments. For example, companies with A-rated credit have a strong ability to meet their financial commitments. Meanwhile, companies in the BBB range -- the last investment-grade grouping -- have an adequate ability to meet their financial obligations. Because of that, deteriorating economic conditions or changing circ*mstances could weaken the B group's financial capacity, especially those at the very bottom level of investment grade (Baa3/BBB-).
Given this differentiator, most investors would consider stocks with A-rated credit the safest and those in the BBB group relatively safe. Meanwhile, anything below that investment-grade line is not a safe investment.
Are all blue chip stocks safe?
Are all blue chip stocks safe?
Generally speaking, blue chip stocks are safe investments. That's because they have to be well capitalized to be in this elite group. However, some are on the fringes (for example, they have a Baa3/BBB- credit rating), which is why we can't categorically say that all blue chip stocks are safe.
History has proven this to be true. For example, before the financial crisis, many investors considered venerable investment bank Lehman Brothers and iconic automakerGeneral Motors(GM 0.43%) to be blue chip stocks. They were well known, well established, and well capitalized at their peaks, but their financial situations deteriorated rapidly when the global economy went into turmoil, which ultimately caused both to file for bankruptcy, causing a permanent loss for investors. Likewise, investors once considered Enron a blue chip stock, but it, too, collapsed, causing irreparable damage to its investors. Meanwhile, in more recent years, General Electric(GE 0.9%) has gone from being among the bluest of blue chips as a member of theDow Jones Industrial Average to being a shadow of its former self because of financial issues. While the industrial gianthasn't filed for bankruptcy, its financial struggles forced it to sell several businesses to pay down debt, which has permanently impaired its value.
Given that history, investors shouldn't automatically assume all blue chip stocks are completely safe. As a rule, however, they do tend to be safer than most other stock market investments.
Safe is a relative term
No investment is without risk. Blue chip stocks are usually less risky and thus considered safer than other stock-based investment options. That's because one of the major determining factors of a blue chip stock is that it must be a well-capitalized company, meaning it should have the financial fortitude to endure an inevitable economic downturn.
Related blue chips stocks topics
What Are Blue Chip Stocks? Should I Invest in Them?These well-known, proven stocks are often household names.
How Many Blue Chip Stocks Are There?Which companies are blue chip stocks? We've got the list.
Top Blue Chip Dividend Stocks to Invest in for the Long TermBlue chips and dividends commingle to create potentially lucrative opportunities for investors who prefer lower-risk investments.
Different Types of Stocks to Invest In: What Are They?Stocks come in all different sizes and varieties. We break it down.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
FAQs
Generally speaking, blue chip stocks are safe investments. That's because they have to be well capitalized to be in this elite group.
Is it safe to invest in Bluechips? ›
Yes, blue chip funds are generally considered good investments. They focus on well-established, financially stable companies, offering stability and the potential for consistent returns. However, suitability depends on your financial goals and risk tolerance. 3.
Should I trust the Motley Fool? ›
Founded in 1993, The Motley Fool is one of the most popular stock picking services. And with over 500,000 paid subscribers (myself included), The Motley Fool is definitely legit.
What are the 10 stocks the Motley Fool recommends? ›
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal.
Are blue-chip stocks worth investing in? ›
Blue-chip stocks are from companies that are large, well-established, and financially sound. These companies have strong brand names and reputations, and they generate dependable earnings. Blue-chip companies usually boast consistent dividends and are often considered to be less risky, given their financial stability.
What are the best blue chip stocks to buy right now? ›
Compare the best blue-chip companies
Company (Ticker) | Sector | Market Cap |
---|
JPMorgan Chase & Co. (JPM) | Financial | $547.08B |
Salesforce (CRM) | Technology | $267.36B |
Caterpillar (CAT) | Industrials | $164.69B |
Data accurate as of May 07, 2024 | | |
2 more rows
Why would someone not want to invest in blue chip stocks? ›
In most cases large companies will be safe investments, however size does not always guarantee safety. In some cases, blue chip companies can become complacent and subject to disruptive competitors which is why investors should be vigilant when investing in traditional blue chip stocks.
What are Motley Fool's double down stocks? ›
Adding to winning stocks can amplify gains. The Motley Fool advises holding onto winning stocks, as they often continue to outperform in the long run. "Double down buy alerts" from The Motley Fool signal strong confidence in a stock, urging investors to increase their holdings.
What is the best stock picking service? ›
Here's a quick look at my list:
- Best overall: Motley Fool Stock Advisor.
- Best quant-driven service: Alpha Picks.
- Best for a high-caliber team of analysts: Moby.
- Best for disruptive technology: Motley Fool Rule Breakers.
- Best for long-term swing trades: Ticker Nerd.
- Best for medium-term swing trades: Zacks Home Run Investor.
What is Motley Fool's all in Buy Alert stock? ›
We regularly see similar ads from the Motley Fool about “all in” buy alerts, sometimes also called “double down” or “five star” buys, and they're generally just the type of steady teaser pitch that they can send out all year, over and over with no updates, to recruit subscribers for their flagship Motley Fool Stock ...
Best Stocks to Invest in India 2024
S.No. | Top 5 Stocks | Industry/Sector |
---|
1. | Tata Consultancy Services Ltd | IT - Software |
2. | Infosys Ltd | IT - Software |
3. | Hindustan Unilever Ltd | FMCG |
4. | Reliance Industries Ltd | Refineries |
1 more row4 days ago
What stock is expected to skyrocket? ›
10 Best Growth Stocks to Buy for 2024
Stock | Implied upside from April 25 close* |
---|
Tesla Inc. (TSLA) | 23.4% |
Mastercard Inc. (MA) | 19% |
Salesforce Inc. (CRM) | 20.8% |
Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rowsApr 26, 2024
What is the most successful stock of all time? ›
The Best Performing Stocks in History
- Coca-Cola. (NASDAQ: KO) ...
- Altria. (NASDAQ: MO) ...
- Amazon.com. (NASDAQ: AMZN) ...
- Celgene. (NASDAQ: CELG) ...
- Apple. (NASDAQ: AAPL) ...
- Alphabet. (NASDAQ:GOOG) ...
- Gilead Sciences. (NASDAQ: GILD) ...
- Microsoft. (NASDAQ: MSFT)
How safe are blue-chip stocks? ›
Advantages. Low Risk: As industry leaders with reliable cash flows and long histories of paying their debts, blue chip companies are considered to be low risk.
Which blue chip stock has fallen the most? ›
Blue Chip* Top Losers of Indian Stocks
Name | Symbol | % Loss |
---|
Bajaj Finance | BAJFINANCE | -10.37 |
Zee Entertainment Enterprises Ltd. | ZEEL | -8.51 |
Bajaj Finserv Ltd. | BAJAJFINSV | -6.82 |
Godrej Consumer Products Ltd. | GODREJCP | -6.41 |
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What are the disadvantages of blue-chip stocks? ›
Slow Growth Rate
Since the businesses of blue chip companies are already mature, they have little future growth potential. This can limit their ability to appreciate in value over time.
What are the cons of blue-chip stocks? ›
Although blue-chip stocks are generally considered a safe investment, there are still risks involved. The value of the stock can still fluctuate based on market conditions, and there is always the risk of a company experiencing financial difficulties or unexpected events that can negatively impact its stock price.
Is Blue Chip Growth fund a good investment? ›
Fidelity Blue Chip Growth: Performance Highlights
The fund's excess returns have also been mostly consistent: Over the 140 monthly rolling three-year periods on Kalra's watch, the fund outperformed the index three fourths of the time and nearly always landed in the category's top third.
What is the average return on blue-chip stocks? ›
In general, the average rate of return on blue-chip stocks is around 10%, which is similar to the indices that they are featured on. A good indicator of blue-chip status is if the company is listed on a renowned stock index.
Are blue-chip stocks long term? ›
The stock market is full of opportunities, but blue-chip stocks are the way to go when it comes to reliable, long-term investments. These companies are the cream of the crop, with solid financials, strong market positions, and a history of weathering economic storms.