What you should know about blue chip stocks


The Nigerian Stock market has returned over 35% year to date and is the toast of both foreign and local investors. In a bullish market, virtually all stocks increase in price, even those without fundamentals.  Investors should choose shares they buy wisely and experts have often suggested that one should hold blue chip stocks ?

What is a blue chip stock

A blue chip stock is a company that has a consistent record of profitability, spanning decades. The term blue chip comes from the game of poker, with the blue chip having the highest value.

How to identify blue chip stocks on the NSE

While blue chips stocks tend to trade at a high price, price is not the only determinant of a blue chip stock.  They should have a consistent record of profitability. One way of identifying them is to pick stocks from the NSE pension index. Pension funds by law can only invest in stocks with a consistent record of profitability, so as to minimize risk.

Why people shy away from blue chips

Blue chip stocks tend to trade at  a premium due to their solid record , making a bit expensive for the average investor. Nestle for example, trades at over N900 a share. Several blue chip stocks, on the NSE are units of foreign subsidiaries, which a hold a huge portion of their shares.  The number of shares available for sale tends to be very low.

How then can you buy ?

Retail investors can buy such shares in tranches or small portions. Bear markets are also a good opportunity to buy blue chip stocks as share prices tend to come down. A bearish market is one that is characterized by a consistent fall in share prices. Investors can also buy units of a mutual fund. Mutual funds tend to invest in mutual funds because of their dividend history and consistent profitability.

 

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