Online stock market trading, Blue-Chip style. I began this journey at a pretty early age. Somewhere along the way the allure waned off due to my time and investments taken up by my own start-ups et al, but the interest remains to date. For those that are in a booming economy, this is a fun business and quite a lucrative enterprise. You do require that passion for the math and the ability for risk-taking; more importantly, the ruthlessness for letting a loss go. I do advise from time to time anyone who comes asking where to put in that extra moolah, and it usually is bang on.
For instance, investing in conservative blue chip stocks may not have the allure of a hot Unicorn high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have consistently outperformed other investment classes over the long term. This is where the current eyewash “mutual funds” seem to be thriving. There is an entire gamut of analyses on a client’s “risk ability” and banks have primed the game to near perfection.
Historically, investing in stocks has generated a return, over time, of between 11 and 15 percent annually depending how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the bottom of the corporate “food chain.” First, companies have to pay their employees and suppliers. Then they pay their bondholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn’t. Thus, investing in stocks is obviously risky because investors never know exactly what they are going to receive for their investment; and when.
What are the attractions of blue chip stocks?
1. Great long-term rates of return.
2.Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.
3. You become the owner of a company.
So much for the benefits – what about the risks?
1. Some investors can’t tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.
2. If you don’t have the time and skill to identify a good quality company at a fair price don’t invest directly. Rather, you should consider a good mutual fund, anyways, they are quite smartly “tailor-made” read: designed for your long-term benefit.
Selecting a blue chip company is only part of the battle – determining the appropriate price is the other. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this doesn’t fully explain reality. In reality supply and demand for a stock sets the stock’s daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time it is voting based on investors’ fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term. And then there is the infamous PESTLE analysis, that invariably sets shit back for the shittiest of reasons on the other side of the globe. Read: anything from a military coup and war to a terrorist attack to oil price rise and the dollar drop or a sub-prime crisis in the United States. Markets crash, today, for the flimsiest reasons that baffle you and me and your friendly neighborhood stock broker.
So, yes, it is a great thing when your invested stock prices rise, and when you get regular good dividends. And yes, this being 2016, so for those that want to live on the edge of sanity and insanity, this is a fun, great journey. Once you’re in it, with a little bit of savvy and the street smarts, you would know when to dip in and when to cash out. And then, there’s always the roulette table!