Investing

Are Blue Chips Always Safe Investments?

As the saying goes, “Buy into a Blue Chip company because it will never go bankrupt”. We can’t deny that if a company has grown to a substantial size, with all the right systems in place, it runs at a lower business risk than that of a smaller counterpart.

The definition of a “Blue Chip”, according to www.investorwords.com, is

“Stock of a large, national company with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products.”

But is it necessarily safe for investments? Let us take a look at the price chart of 2 companies:

Note: this is purely for educational purposes only. It is not meant in anyway to put down any companies mentioned in this article.

Blue Chip A

If you had bought this Japanese blue chip technology giant in March 2010, when the stock had costed $38.64, your investment will be only worth $20.47 today. That’s a loss of 47.02%

Blue Chip B

If you had bought this Singapore based, global container and shipping company that was once part of the STI, with over 11,000 staff in 331 offices spread across 112 countries, in Jan 2011 at $2.34, the stock would only be worth $0.85 today – that’s a loss of 63.68%!

Both companies highlighted above are of “blue chip” standard, and they are also part of the components that make up their respective nation’s main stock market indices. However, their blue chip status did not spare the price of these stocks from taking a nose dive when business did not do well.

How do you avoid making such a mistake? The answer is by understanding the fundamentals of finding a good company that is healthy, and buy it at the right price. By knowing the fundamentals of the company, you not only know that it will remain as a good company in the long run, you will also be able to earn stable profits from it.

Many people have told me that they are risk-adverse. My reply to them is to invest in their knowledge first before investing in the stock market. Investing in anything blindly is taking a high risk. The reverse is true – with the right knowledge, you will be able to mitigate any risk that comes your way.

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