Risks Involved in Blue Chip Stocks?
Blue Chip Stocks, like any other investment alternatives are surrounded by market and economic risks, however, the degree of risk may vary. Lets’s understand this in detail:
1. Economic and Market Downfall: Although it is believed that long history of operations and experience makes Blue Chip Companies capable of facing market cyclones, still they are not immune to such downfalls. During the market depression, even well-established companies experiences declining sales, reduced profitability, and a fall in the market value of their shares.
2. Expensive: Blue Chip stocks are issued by the dominant market leaders who can affect the market substantially. The great market reputation of these companies makes the stock expensive and beyond the reach of many small investors. Hence the investment remains concentrated in the hands of the institutional investors.
3. Low Growth Rate: The Blue Chip Companies are well-established and fully-grown companies for whom growing days are in their past. Hence investors who invest with the objective to grow and earn out of capital appreciation shall not opt for Blue Chip stocks, as these stocks appreciate steadily.
4. Dividend Reduction or Suspension: Blue Chip Companies are famous for their consistent dividend pay-off policies, but there is no guarantee that they will continue to do so in the future. Any downturn or change in business strategy can lead to Dividend Reduction or Suspension, which may adversely affect the interest of the investors.
5. Legal Risk: Blue Chip Companies are large-cap companies that operate under complex legal environments. Any changes in laws and regulations may adversely affect the financial performance and reputation of the company. This may pull down the market value of the stocks which can cause capital loss to the investors.
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