Blue chip shares are investments in well-established companies and leaders in their respective industries. Blue chip companies in general are financially stable with a history of solid earnings. Investors buy blue chip shares for investment safety, predictable returns, consistent dividend payments and their defensive nature in market downturns. However, investors may have to trade the benefits of owning blue chip shares for certain disadvantages such as low returns, slow growth, little volatility and expensive pricing, which can also become disincentives to some investors when considering blue chip shares.
Like any investment, returns on blue chip shares are commensurate with their risk. Providing a high degree of investment safety from their predictable, steady business operations, blue chip shares are low-risk investments, and thus returns are normally low as well. Because of this disadvantage, blue chip shares are not suitable for investors who have a high level of risk tolerance and are more aggressive in their investment approaches.
Blue chip shares are comprised of large-cap companies with maturing businesses and markets, compared with small- and mid-cap companies that are still in their development stages and have a high potential for growth. Nevertheless, blue chip share may yet deliver earnings increases over time, but the growth is likely to be small and steady. While blue chip shares may be ideal for investors seeking value accumulation over the long-term, their slow growth presents a particular disadvantage to growth investors who expect above-average growth and large share price moves in a short period of time.
Large price swings in trading are uncommon with blue chip shares, as their respective companies are financially stable with smooth operations. Little volatility can be a plus for some investors who desire consistent investment returns, but this is actually considered a disadvantage to others seeking varied trading gains. While many value investors choose blue chip shares based on fundamental analysis, the lack of volatility makes them unsuitable in technical trading for quick, short-term profits.
Blue chip shares tend to commend higher valuation in market trading supported by investor demand. Blue chip investors may include those who invest in blue chip shares for consistent long-term returns, switch to blue chip shares for investment safety during economic downturns and favor blue chip shares for predictable dividend payments. As a result, prices of blue chip shares are more expensive, which creates a disadvantage for the investor who may not be particularly interested in blue chip shares, but mainly needs them to spread his investments among various share classes for diversification purposes.
- Sophisticated Edge: What Are Blue Chip Stocks?
- Know Mutual Funds: Investing in Blue Chip Stocks
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An investment and research professional, Jay Way started writing financial articles for Web content providers in 2007. He has written for goldprice.org, shareguides.co.uk and upskilled.com.au. Way holds a Master of Business Administration in finance from Central Michigan University and a Master of Accountancy from Golden Gate University in San Francisco.