Blue Chip Stocks – A Good Investment Alternative

Investing in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over the long term.

Historically, investing in stocks has generated a good return, over time, of between 10 to15 percent annually depending how aggressive you are. Stocks outperform other investments as they are more prone to risk. Stock investors are at the bottom of the corporate "food chain." First, companies have to pay their employees and suppliers. Then they pay their bondholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn't. Thus, investing in stocks is risky because investors never know exactly what they are going to receive for their investment.

Given below are some of the important benefits of investing in blue chip stocks.

• You as a shareholder become the owner of a company.

• Rates of return for long term are relatively good.

• Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.

But there are also certain risks associated with these benefits. They are:

• Don’t invest directly if you do not have the time and skill to identify a good quality company at a fair price. Rather, than go for investing in a good mutual fund.

• Some investors also can't tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.

Selecting a blue chip company is only one part of the game - determining the appropriate price is the other. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this doesn't fully explain reality. In reality supply and demand for a stock sets the stock's daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time, it is voting based on investors' fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term.

Thus investors should look at good companies with great expectations that are not yet imbedded in the price of a stock.