The success rate in the stock market is fairly slim. More than 80% of traders and investors lost money and are struggling to succeed. The risks that you may face in the stock market is enormous especially if you do not know what you are doing. Risk management is very important in trading and investing in the stock market. The knowledge and experience that you have will be worthless if you can’t manage your risks properly.
One way to reduce risk is to pick blue chip companies. Blue chip companies are ideal to investors but they are appealing to short term traders as well. These companies have performed so well in the past and are most likely to continue to do so in the future. They are stable, have a very good reputation, and normally are being managed by very competent individuals. However, keep in mind that despite the fact that blue chip companies are seemingly safer picks, it doesn’t guarantee that it will work out the way you planned it to be. Picking the right company is quite a challenge and you’ll have to consider a few things before coming up with a decision. Here are some tips in picking the right blue chip companies for your goals.
As a short term trader such as being a day trader and frequent swing trader, you can pick blue chip companies that shows great technical potential. Short term traders are more biased to technical analysis because it dictates the price action and market sentiment towards a particular stock. Check the price action, trend, patterns, volume, and other significant indicators such as MACD, RSI, and DMI to determine where the price would be going and to confirm your decision. Short term traders are also on the hunt of news and updates about further diversification plans, financial statement releases, public offerings, etc. News motivates price hence if the news is good, the price is most likely going to go up sooner or later and reverse if it is a bad one. The earlier you get the news, you better your chance of getting a better position. Blue chip companies normally give out great news from time to time so you’re in a better chance to make a good decision.
As a long term swing trader or an investor, you may be more concerned about the company’s future plans at least in a year’s time. Long term traders or investors never mind the daily fluctuations the market is undergoing because they are confident that a particular stock will just go up in time. If short term traders time the market and try to get the stocks that will go up within a day or within a short period of time, long term traders and investors wait for that golden moment for a particular stock t go up. That is why blue chip companies are much more ideal and preferred by investors because they are confident that its value will either go up in time or gradually. Some things that you need to learn and keep an eye on as an investor are the company’s earnings per share (EPS), Price-to-Earnings Ratio (P/E ratio), and Return of Equity (ROE). These ratios can be determined through the raw values from financial statements which are given out by companies normally on a monthly basis. Hence, as an investor, you must know how to read financial statements.
Publicly listed companies are big companies but they not all publicly listed companies are blue chip companies. So how are you going to identify a blue chip company and which ones are the best ones to pick? Check the companies that are included in the different indices. The chances of finding blue chip companies are higher in indices. Companies in the indices are big companies and they determine the status of the economy.
Another way to check a company is to look at its financial statements and company background. How diversified is the company? how much is it earning? How long has the company been operating? Has it been successful throughout the years? Blue chip companies are old companies that grew over time. They are earning so well at least in hundreds of millions or even billions. Blue chip companies also give dividends. Check the dividend history of companies to see if they give consistently. annually in most cases. If a company is earning well, has operated for a long time, preferably in decades, has a good management team, and gives dividends consistently, you can be sure that such company is a blue chip company.
There are some blue chip companies that are so easy to spot. Economy movers and very huge companies such as Microsoft, Google, and automobile giants are guaranteed blue chip companies. They will be doing a lot better in years to come.
Buying a blue chip stock is fairly easy but picking the best ones are the challenge. If you know how to compute the EPS, P/E, and ROE, understand technical analysis, and get valuable data of a particular company, you are assured that your chances will increase. Blue chip companies are the last companies that will fail so consider it, reduce your risk, and increase your investment and trading success.