Blue chip and growth stocks are both revenue-generating stocks. However, they differ greatly in where they come from and how they benefit investors. While both make for good investment choices, understanding their differences can help you pick the most suitable option for your individual investment needs.
Blue chip stocks are an excellent investment for investors looking to build wealth steadily, reliably, and safely. On the other hand, growth stocks attract investors who hope to cash in on potentially high profits once the growth company succeeds.
Are you torn between investing in blue chip stocks vs. growth stocks? In this article, I will summarize all the information you need to make an informed investment choice between the two stock categories. Plus, you will discover the key differences between the two and which one makes a better investment decision for you.
Differences Between Blue Chip Stocks and Growth Stocks
Here are some of the main differences between blue chip stocks and growth stocks:
Blue Chip and Growth Stocks Come From Different Types of Companies
Blue chip stocks are shares of highly-reputable, well-established public companies known for their solid performance and long history of generating consistent profits. The businesses are often leaders in their respective industries and typically operate safely and reliably.
While the term blue chip originates from poker, there is no correlation with gambling when investing in blue chip stocks. These companies are stable, prosperous, valuable, and reliable. They’re mostly big household names like Apple and Walmart.
On the other hand, growth stocks are stocks from small or midsize, fast-growing, and newly-established companies that boast recent growth in earnings or the potential for considerable future expansion.
These companies are typically pioneers in their industry and often conduct research in medicine or technology. They also have products or services that are expected to perform well.
Blue Chip and Growth Stocks Present Different Investment Opportunities
Blue chip stocks are great for investors keen on creating wealth steadily and prudently. Though they are usually relatively expensive, they remain immensely popular because of their long history of paying regular dividends. Thus, they hold great appeal for investors interested in receiving dividend income and preserving their capital.
Additionally, dividends from blue chips tend to rise steadily over time. This is because blue chips are mature companies that no longer need to fund their growth as much. They, therefore, distribute most of their earnings amongst their shareholders, which further boosts their attractiveness.
On the other end of the spectrum, growth stocks are relatively affordable and represent businesses on a growth trajectory. In most cases, the stocks outpace the market though they hardly pay dividends since they re-invest all their earnings and profits to fund business growth and expansion.
Again, since they are mostly relatively new businesses, growth stocks do not possess a track record of reliable operations. As such, investors purchase growth stocks mainly for capital appreciation. They are interested in the possibility of reaping higher profits after the business succeeds.
Blue Chip and Growth Stocks Pose Different Levels of Risk to Investors
Trading in stocks is a risky business. That said, blue chip stocks are time-tested and are the less risky option to invest in. They act as a safer investment during economic downturns because they generally lose less overall value compared to growth stocks.
On the other hand, growth stocks carry higher risks. They are less mature and contain smaller margins. On the one hand, the companies generally perform much better than the market when stock prices are on an upward trend. However, they are also prone to underperform the market when stock prices plummet.
In other words, since they tend to grow so fast – some can rake in triple-digit returns in a relatively short time – growth stocks are often unable to maintain a foothold in the marketplace. Thus, they find it a challenge to continue growing during downturns.
Also, while it’s possible to make considerably more profit from capital appreciation (growth stocks) than from dividend income (blue chip stocks), the risks are also significantly higher. A fast-growing stock’s price can soar, but it can also plunge suddenly, placing you at risk of immense loss.
The high risks notwithstanding, growth stocks draw investors because of the promise of potentially high rewards. Indeed, some of today’s best-performing stocks like Apple, Amazon, Netflix, and Facebook began as growth stocks, and early investors here earned even quadruple-digit returns.
Blue Chip Stocks Are Considered Safer Than Growth Stocks
Because they pose lower risks to investors, blue chips are considered much safer than growth stocks. As mentioned, they endure economic downturns, aren’t volatile, pay dividends, plus they present a steady growth potential. However, growth stocks are highly volatile, rarely pay dividends, and are not as reliable.
Blue Chips Are Less Agile Than Growth Stocks
Unlike growth stocks, blue chip stocks boast large market capitalization. These large caps boast a market valuation upwards of $10 billion. They also make up major market indexes, including the Dow Jones Industrial Average, S&P 500, and the Nasdaq 100.
On the other hand, growth stocks are stocks from small-cap companies. However, their smaller size means that they are more agile and can respond with more flexibility to market changes.
This capability enables them to leverage new technologies and manufacturing methods that blue chips might consider not worth investing in. Because of their flexibility to market changes, growth stocks can generate considerable returns for investors.
Here is a summary of the key differences between Blue Chip Stocks and Growth Stocks:
|Blue Chip Stocks||Growth Stocks|
|From established, well-performing companies||From small or mid-sized newly established companies with high growth potential|
|High capitalization||Low capitalization|
|Quite pricey||Relatively affordable|
|Pay regular dividends||Re-invest profits to fund business growth and expansion|
|For investors looking for regular income||For investors with a long-term outlook and those who are looking for capital appreciation|
|Stable and reliable||Highly volatile|
Which Stocks Make a Better Investment? Blue Chip or Growth Stocks?
The best investment depends on your goals, time horizon, and risk appetite. If you are risk-averse, prefer stability, and are keen on earning a steady income, go for blue chip stocks. However, if you are risk-tolerant and desire capital growth, growth stocks are the best option for you.
For example, if you are about to retire, growth stocks would not make a suitable investment due to their volatility and the time factor involved. But if you are a long way from retirement, time is on your side, and with higher risk tolerance, you can reap the benefits of growth stocks. Therefore, your unique circumstances will determine which stocks are better for you.
Many prudent investors choose to combine growth stocks with dividend-paying stocks as part of a diversified portfolio. The plan here is to benefit from capital appreciation over time while providing their portfolio with the stability offered by dividend income. Dividends reduce volatility and add to overall returns.
Hence, you can choose to invest in moderate growth stocks that will pay dividends with time or combine blue chips that pay generous dividends with fast-growing growth stocks.
If you decide to invest in growth stocks, you will need to adopt a long-term strategy to earn significant returns. This means you need to exercise patience. Additionally, getting out of a stock too soon could cost you because you might miss out on substantial gains many months after.
In addition to the above, follow the below tips. Make sure to:
- Look for smaller, lesser-known stocks with excellent growth potential.
- Choose businesses with products and services you understand and believe in.
- Diversify your holdings – pick stocks from different fast-growing industries with revolutionary technologies and essential products.
- Be prepared to hold your stocks through any market swings.
- Know when to cut your losses so that you have enough capital left to continue investing.
While they might not be as fancy as fast-growing tech stocks, blue chips sport a solid history of sustained growth, reliability and promise attractive prospects. They also weather market downturns relatively well. On the other hand, growth stocks provide a great opportunity to earn high returns if you choose wisely.
Ultimately, your personal circumstances, risk profile, and investment horizon will dictate the most appropriate investment to suit your needs.