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Investment Strategies - 3 Type of stocks (Blue Chips)

Before we plunge into the market. We need to understand the different type of stocks in the market. You've heard about the blue chips and penny stocks but there are actually more categories. Anyway, we will focus on blue chips today.

Blue chips are everyone's favourite. This is because those stocks which are categorised as blue chips have the following traits:-
- They are big companies with a lot of years in business. (Very established business with little or minimum liabilities)
- They pay dividends almost all of the time (even when the economy is not doing that well.
- Their stocks have large market capitalization.
- Price is normally high.

Notice I have highlighted the second statement. Dividends. This is the most attractive part of investing in blue chips. They pay out almost every year and this money is immediately your profit. Prices of blue chips are also very stable and less prone to high or low drops. This is good as if you want to exit the market. You could get out easily too as they WILL ALWAYS be BUYERS for such stocks. Even if the price is lower than what you have bought when you try to sell, if you have already hold onto the stock for a few years, the dividends might already cover your lost!

Think about this scenario too. If a market is crashing and you are holding blue chips. The chances that it will regain back to the original price will be much higher than penny stock as it has huge market cap and very little liabilities. It just take time to it recover and recover it will! And if you have spare cash (remember the 30% reserve) during a market crash, its the best time to hunt for such bargain blue chips.

But the main issue is the price. Its normally very expensive to even buy 1 lot of blue chip stocks. So another way for small investor like me is to look out for potential stocks that may become a blue chip. How do we do that? Well, we search for them!

Just looking at the traits above, you could tell that any good companies that have been paying good dividends yearly and have a good track record in their business could one day become a blue chip. Keppel Corp is exactly a good example. 4 years ago, in 2003 its price is 3.00++ (actually less than 3 dollars). It rose to $20 plus this year. And it made a stock split (1 becomes 2 $10.00 stock) and its still rising! We could actually predict such stocks (not 100% but at least more than 50%) if we search around the stock market and look out for such gems. Imagine, 4 years ago, you bought 2 lots of Keppel at $6000.00SGD. Today it will be worth more than 40,000SGD!!! That's how many % profit?? Do you think any savings policy or bank could give you such an interest rate??

Of course in reality, such increases in stock prices are extremely extremely rare. But I was one of the lucky ones. hehe So I made some money out of it. But I am still holding onto my Keppel stocks as I do not need to sell. I could cash out but its still performing and I do not need the cash at the moment.

The main point here is, we could look out for potential blue chips stocks which are not that expensive and stick to it. Buy and HOLD. At least for a few years. For my case if I find a potential blue chip, I would hold at least a 5 year period before I determine if its something worth investing. If its not (such as not paying dividends in due and are in debt) Just sell and recover the lost and look for another one.

I shall stop here for all to absorb. Next post will be on penny stocks.

*For those interested, the name blue chips is derived from poker game chips. Where the blue coloured chips are the most valuable or highest amount of bet.


Youth of Nation said...

One of my favorite stocks in the past was Whole Foods Market (WFMI), but these days with the competition, public awareness of eating healthy, and the FDA re-evaluation on what is considered organic, the company has been seen as out of favor. The truth is Giant, Safeway, and even Walmart are coming out with their "Freshly Grown" or "Grown Organic" slogans. It is all fake the FDA (food and drug administration) in my opinion did wrong on doing this. It under rated what truly organic is and what Whole Foods stands for. I remember when I first started with the company the stock was a $17/share then it shoot up to $60/share a couple years later, then it went on a stock split 2 times the last highest stock price I remember was $127/share. Now after the split and becuase of all the competion it is down to around $35/share. I am tempted to buy and just leave it along, but the market is very turbulant right know.

trend investing said...

After reading this I thought it was very informative. Thank you for taking the time and effort to put this article together. I find myself once again spending way to much time to both read and comment. But so what it was still worth it!