Investing in conservative blue chip stocks may not be as exciting as investing in a hot high-tech company, but it can still be very profitable because, over the long term, good quality stocks have done better than other types of investments.
In the past, investing in stocks has given investors a return of between 11 and 15% per year, depending on how risky they were. Stocks do better than other investments because they are riskier. Investors are at the bottom of the "food chain" of a company. First, businesses have to pay their workers and vendors. Then they pay those who own their bonds. Then come the shareholders with the most shares. Companies have to pay all of these people first, and if there is money left over, it goes to the stockholders through dividends or retained earnings. There is sometimes a lot of money left over for stockholders and sometimes not. So, investing in stocks is risky because investors never know for sure what they will get in return.
What's so great about blue chip stocks? 1. Great rates of return over the long term.
- You start owning a business.
- There are no ongoing fees, which is different from mutual funds, which are also a relatively safe long-term investment.
Now that we've talked about the benefits, what about the risks? Some investors can't handle both the risk of investing in the stock market and the risk of investing in one company. Not every blue chip is the same.
- Don't invest directly if you don't have the time or skills to find a good company at a fair price. You should instead think about a good mutual fund.
Finding a "blue chip" company is only half the battle. The other half is finding the right price. In theory, the value of a stock is the present value of all future cash flows that have been discounted at the right rate. But, like most theories, this doesn't fully explain how things are. In reality, the daily price of a stock is set by supply and demand. The demand for a stock will go up or down depending on how the company is doing. So, the price of a stock is based on what investors expect from a company. The better the expectations, the better the price of the stock. In short, the stock market is a voting machine, and most of the time it votes based on investors' fear or greed instead of their rational assessments of value. Stock prices can change a lot in the short term, but in the long term, they tend to move toward their true value.
Investors should look at good companies with high hopes that haven't yet been priced into the stock price.
