Blue Chip Stock vs. Growth Stock

by Justin Johnson, studioD

Investing in the stock market profitably can be a challenge for many people. Whether investing in the stock market with a financial adviser or day trading from home, it is important to be an informed investor. Two important classifications of stocks that can be invested in are blue chip stocks and growth stocks. These two investment types can be a good choice for many investors, depending upon their investment strategies.

What are Blue Chip Stocks?

Blue chip stocks are considered to be investments that have a low risk factor. Blue chip stocks can generally be counted on by investors to provide investment returns in a variety of market conditions. These stocks are those of companies that are in good financial standing and are safe from the many market cycles that can affect weaker companies. Another characteristic of blue chip stocks is that they typically pay dividends to their shareholders.

What are Growth Stocks?

Growth stocks are considered to be investments that present more risk to the investor. In exchange for the increased risk, growth stocks have a huge upside in terms of price appreciation. Many growth stocks do not pay dividends, because they reinvest this crucial capital back into the business to fuel additional growth.

P/E Ratio Analysis

Price-to-earnings ratios are important when analyzing blue chip and growth stocks. The P/E ratio indicates the growth expectations of a company and is calculated by dividing the market value per share by the earnings per share. Many blue chip stocks have lower P/E ratios than growth stocks. The P/E ratio of a company is reflective of the number of years of earnings it would take to equal the present value of the company.

Determining Which Is Better

Individual investors have varying levels of risk that they deem to be acceptable. To what extent investors are risk averse depends upon many factors. An older investor with little time before retirement is more likely to invest in blue chip stocks, because they are typically less volatile and more likely to produce a return. A younger, more aggressive investor may be more likely to invest in growth stocks, becuase the probability of achieving high growth over a long period of time is likely. Risk aversion is the concept that determines whether an investor should place his money in blue chip stocks or growth stocks.

About the Author

A southeastern Ohio native, Justin Johnson is a finance professional with accounting and financial planning experience in various manufacturing industries. He discovered a love for writing as student at Pensacola Christian College and after learning many lessons in the workplace, he enjoys writing business and finance pieces.

Photo Credits

  • Thinkstock/Comstock/Getty Images