Decoding Stocks: Blue-Chip, Value & Growth

If you ever tune into the financial media, you’re likely to encounter terms for different types of stocks. Blue-chip may be a frequent one; so are value and growth. But what do these terms mean? 

Terms like these are a kind of shorthand description of a stock’s size, history, or risk profile.  With a single word, experienced investors can learn a lot about a company's size, potential, and risks. And since each investor may have different goals to consider when selecting their investments, some may choose to focus on one type of stock over another.   

Let’s break down each term so you know what they mean if you ever hear them mentioned. 

Blue-Chip Stocks

This term refers to stocks from large, financially stable companies with good reputations. (The name comes from high-valued chips in poker, which are often blue in color.) 

Typically, these companies have a sizeable market capitalization. Blue-chip stocks are often household names that people may easily recognize. If you look at the credit card in your wallet, the soda in your fridge, or the labels in your medicine cabinet, you will likely see examples of blue-chip companies. 

Investors may prefer blue chip stocks for a variety of reasons. First, because these companies are well-established, they are often seen as less volatile. While not guaranteed, blue chip companies tend to last for decades and can often weather recessions. 

Another reason investors may like blue chip companies is because they often pay regular dividends. A dividend is when a company pays a percentage of their profits to shareholders, usually on a quarterly basis. These dividends can either be reinvested or used as a source of income. 

Value Stocks

Imagine there were two fine dining restaurants in your area. One is famous— the kind of place that gets mentioned in travel guides and where people go to propose.

The other, located a few blocks away, is a tiny spot that hardly anyone knows about. But it tastes just as good as the touristy place, and best of all, it’s so much cheaper. So, you decide to go there more often than not, aiming to enjoy it for as long as you can before the word gets out. 

Value stocks are similar. The term refers to companies that seem undervalued. This means they are selling for less than what some analysts may believe their intrinsic value is.

Investors seeking value may look for companies with strong leadership. They may prefer firms with steady revenue and a solid competitive edge. A low share price compared to earnings is also important.

Value stocks aren’t always easy to find, and the very concept of “value” is a subjective one. But the idea is to find companies that may offer long-term growth potential. Because, like that neighborhood restaurant, once the word gets out and the stock gets more popular, it could rise significantly in price. However, the risk of a value stock is that it could stay “undervalued” for a long time.

Growth Stocks

This term refers to stocks that have the potential to significantly increase in price over time. Often, growth stocks are younger companies seeking to set new trends or impact an industry. These companies often focus on growth and reinvest their earnings into expansion. Since technology is constantly changing, many investors look to up-and-coming tech companies for growth stocks.

But with this potential for growth comes the potential for more volatility. Growth companies are often riskier than value or blue-chip stocks.

They tend to be younger and unproven. Their finances may also be less stable. For every growth company that succeeds and matures, there may be a handful that fail and disappear.

Bottom Line

When it comes to investing, understanding the different types of stocks—blue-chip, value, and growth—can help you build a portfolio that aligns with your goals and risk tolerance. Each type has its own advantages and challenges, and there’s no one-size-fits-all approach. Ultimately, a well-balanced portfolio often includes a mix of all three, allowing you to potentially benefit from their strengths while helping you manage risk.

Sources :

https://www.nerdwallet.com/article/investing/blue-chip-stocks

Disclosure:

 This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

 Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation