Understanding blue-chip stocks

If you're interested in investing, you might have heard about 'blue-chip stocks'. The name comes from poker, where blue chips represent the highest value. In finance, blue-chip stocks are considered the best to invest in. In the article, we'll dive deeper into the blue-chip stocks in Malaysia and discuss their pros and cons so that you can make better choices when investing.

What are blue-chip stocks?

Blue-chip stocks are the shares of huge well-known companies that have been successful for a long time. These companies are considered to be the top players in their field—everyone trusts them because they usually do well. The term 'blue chip' is derived from poker. In this game, blue chips are regarded as the most valuable ones.

Blue-chip index

There's a term 'blue-chip index'. This is like a scoreboard that tracks how these big companies' stocks perform. It shows if their stock prices are going up or down. In this scoreboard, companies with higher stock prices have a more significant impact on the score than those with lower prices.

Investing in blue-chip stocks is safer than investing in smaller or less-known enterprises because these big companies are more stable. Since Malaysia's blue-chip companies are strong financially and have a good reputation, they usually come with less risk. They also often pay regular dividends, which is extra money to investors, and those payments tend to increase over time. That is why many people see blue-chip stocks as a safe investment method.

Key characteristics of blue-chip stocks

Here are the major features of blue-chip stocks:

Not all blue-chip companies in Malaysia are guaranteed to be good investments. It's worth noting that blue-chip companies usually grow slower than smaller enterprises that can adapt and have strong leaders. However, some investors still feel that blue-chip companies are safer to invest in.

How to identify Malaysia's blue-chip stocks

A blue-chip company is a big, well-established business that is usually really reliable. Here's how you can tell if a company is a blue-chip:

• In Malaysia, these businesses include companies like Maybank, Petronas or CIMB. Look at the Bursa Malaysia stock exchange. They often have a list of blue-chip stocks, usually included in the FTSE Bursa Malaysia KLCI index.
• Blue-chip companies often offer different types of products or services. This means they're not just focused on one thing, which helps them stay strong even if one part of their business isn't doing well.
• These companies are usually the best in their field. They might be the top choice for customers or have the largest share of the market.
• Many blue-chip companies operate in different countries, not just their home countries. This global reach shows they are well-established and trusted around the world.

Differences between blue-chip and penny stocks

When people talk about investing in the stock market, they often mention blue-chip and penny stocks. These are two types of stocks, each with their own good and bad points. Let's understand the two stocks in more detail.

Advantages and disadvantages of blue-chip stocks

Here are the positives of investing in blue-chip stocks:

• Blue-chip stocks usually grow steadily over time. They also pay out money (called dividends) regularly, giving you extra cash while investing.
• These companies are financially strong. They have good money management and can handle tough times better than many others. This means they're less likely to go broke during a recession.
• Blue-chip stocks tend to do better when the economy is struggling than smaller companies. They have the resources to survive challenging situations, which helps protect your money.
• Investing in different blue-chip stocks from various industries (like tech, healthcare, finances) helps spread out your risk. If one stock doesn't do well, others might still perform fine.
• Many blue-chip companies operate all over the world. This gives them more chances to grow, especially in new markets where there's potential for profit.

Here are the potential risks and drawbacks of blue-chip stocks:

• Sometimes, people think blue-chip stocks are 100% safe and pay too much for them. It's essential to check if the price is fair before buying.
• While blue-chip stocks are stable, they might grow slower than smaller, newer companies. If you're looking for significant returns quickly, these might not be the best choice.
• Big companies can encounter legal issues or regulations that could hurt their stock prices. This means your investment could lose value if they face legal issues.
• Blue-chip companies can face tough competition from smaller companies or new technologies that could take away their market share and affect their growth.

How to invest in blue-chip stocks

If you want to invest in blue-chip stocks, here's what you can do:

• Before buying, check how the company is doing financially. Look at how much money they make, if they pay dividends (extra cash to shareholders), and how much debt they have compared to their earnings.
• Ensure you're not paying too much for the stock. You can do this by looking at the price-to-earnings (P/E) ratio. This helps you see if the stock is reasonably priced compared to others.
• Blue-chip stocks are great for steady growth over time. It's better to hold onto them for a long time instead of buying and selling often, which can be risky and take much time.
• Don't put all your money into one stock or one type of company. Investing in different companies and industries is safer so that if one doesn't do well, you're still protected.

Top 3 blue-chip stocks in Malaysia

Final thoughts

• Blue-chip stocks are shares from huge and famous companies that have been doing well for a long time.
• These businesses usually remain stable even when the economy is tough, and they can make a lot of money when the economy is strong.
• Blue-chip stocks can be relatively expensive because they're so trusted and popular.
• People tend to think they're safe bets for investing. But just because a company is big and even world-renowned doesn't mean it will always do well; sometimes, even this type of company may collapse.
• Investing in blue-chip stocks can be a good idea, but it's wise to spread your money around instead of investing it all just in them.