Blue chip is the term used to refer to the shares of big companies, which usually have a large representation within the universe of listed companies. Their roles are characterized by high liquidity, meaning that there is a strong interest from investors in trading these shares. Most of the time, they represent undisputed leading companies in their fields, often accompanied by large dividends and shareholder cash generation.
In the past, blue chip stocks were higher-priced stocks, or often the most expensive ones. Today, the term is more related to liquidity, representing the most traded stocks on the stock market, from traditional and large companies.
The term comes from the poker game
In poker, as in other casino games, the blue chips are the most valuable. A famous version of the origin of this nickname comes from the 1920’s when Oliver Gingold, a Dow Jones employee, watched the quote board where some stocks were trading at very high values for the first time. He then said that he would write about these “blue chip stocks”.
Characteristics of blue chip companies
As mentioned stocks that fell into this category have high liquidity, other characteristics are:
Large market capitalization – blue chip stocks are often large cap stocks, which typically mean they have a market value of $10 billion or more.
Growth history – present a reliable, solid history of sustained growth and good future prospects. They might not be flashy like fast-growing tech stocks, but that’s because they’re already established.
Component of a market index – blue chip stocks are in major market indexes like the S&P 500, the Dow Jones Industrial Average and/or the Nasdaq 100.
Dividends – not all blue chip stocks pay dividends, but many do. Dividends are regular payments made to investors from a company’s revenue. Companies that pay dividends are often mature, which means they may no longer need to invest as much revenue back into their growth.
Examples Of Blue Chip Companies
Identifying these companies is not a difficult task because, generally, they are household names. Here are some you might recognize:
Amazon (AMZN), American Express (AXP), Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), Costco (COST), Disney (DIS), Goldman Sachs (GS), Home Depot (HD), IBM (IBM), Johnson & Johnson (JNJ), McDonald’s (MCD), Microsoft (MSFT), Nike (NKE), Starbucks (SBUX), Verizon (VZ), Visa (V) and Walmart (WMT).
How to invest in blue chip stocks
There are several ways to invest in blue chip stocks. The traditional approach is actually to buy their shares and hold them over a long period of time. There are, however, some pros and cons to this approach.
When you own shares in a company that generates constant profits over time, the company reinvests those profits. This can lead to higher revenues for the company and the numbers can greatly increase.
Active trading in blue chip stocks can be very lucrative if done right. While corporate blue chip stock prices are generally not as volatile, there are speculative stocks that pose much more risk.
Blue chips can provide steady gains over time, but they also provide great trading opportunities for active traders. There are also different instruments that traders can use to trade blue chips, depending on their personal trading style.
The reliability of blue chips
Blue chip companies are popular among inventors, especially older or more risk-averse investors because of their reliability. That doesn’t mean they’re immune to market downturns, but it does mean they’ve shown a history of weathering these storms and bouncing back.
These are companies that have a proven business model and have used their retained earnings to grow more. Most of them also have a great competitive advantage, which makes it very difficult for other competitors to usurp their market shares.
Investors also appreciate the dividends blue chip stocks typically pay. Dividends are especially attractive if you are investing for income, as many investors do in retirement.
Benefits of investing in blue chips
- It comprises a good long term investment option, due to growth history.
- A safe option because of its nature, which is an excellent advantage in times of economic hardships.
- Usually offers high dividends to offset the stable price.
Although no stock is risk-free and returns are not guaranteed, blue chips correspond to the best risk-return ratio
An alternative: Blue chip funds
Whether you are buying blue chip stocks or not, building a portfolio out of individual stocks takes time and research.
That’s why investors turn to a low-cost index fund or exchange-traded funds instead. These funds contain a curated collection of investments and allow you to purchase a large selection of stocks in one transaction. It’s easy and instant diversification – at least, of course, among blue chip companies.
Since blue chip stocks typically have large market caps, a large-cap index fund or ETF is a good way to get exposure to these companies. You can also buy a fund that tracks the S&P 500 or the Dow Jones Industrial Average since both include blue chip stocks.
The main characteristic of a blue chip stock is its high liquidity. They are sold very easily on the stock market. If you buy one of them, you can easily resell and find an investor interested in buying it.
Although blue chips generally perform well, that doesn’t necessarily mean they can’t be surpassed by other stocks Every year, there is a group of stocks, usually of technology companies, that outperform blue chips, although this performance stems from greater volatility and risk.
Furthermore, some blue chip companies are in bankruptcy. The reason may be due to changes in technology or consumer trends. Many traditional retail chains are currently in a downward spiral. For example, analog camera manufacturers and car manufacturers are examples of companies that are currently not what they used to be.
Investment decisions should not be based only on the “fame” of these shares. The price of a share is the result of the supply x demand ratio, so it’s important to be aware of market trends.