What are Blue Chip Stocks?
Simply put, blue-chip shares or stocks are the shares of companies with excellent and sound histories, or you may call them renowned and “big companies.”
These companies have strong financial histories. They have stronger market growth rates, and they pay dividends regularly (mostly).
There are certain traits that are associated with blue chip stocks, such as quality, reliability, and offering high profitability irrespective of economic situations.
However, there is no formal definition or specific benchmarks for a stock or a company to qualify for this terminology.
History of the Term Blue Chip
The term” blue-chip” was first used in 1923 by an employee (Oliver Gingold) of the famous “Dow jones.” He observed a trend that some specific stocks were being traded regularly at a rate of 200$ per share or sometimes even more than that.
The idea was taken from poker chips used by gamblers while playing poker. Those chips are in three colors: red, blue, and white. The blue chip holds the most significant or highest value in poker, and that’s how the term “blue chip” evolved.
This term is not only used for stocks, but it is also used for companies, commodities, products, and services. In short, blue-chip is a term that signifies the high value and importance of anything.
Criteria for Being a Blue-Chip Stock
As mentioned above, blue-chip shares are the stocks of historically reliable and old corporations. However, there is no particular condition for a company to qualify for the blue-stocks list.
Yet, corporations whose total capitalization is not less than $5billions are generally considered as blue-chip companies, while some categories require the minimum capitalization amount to be at least $10billion.
However, there are some companies with a capitalization value lesser than $5billion, and still, they are considered as blue-chip companies because they are market leaders in their respective industries.
On the contrary, some blue-chip companies also do not pay dividends regularly (which is another characteristic of blue-chip stock companies). Yet, they fall in this category because of their capitalization values and market penetration and growth.
The best thing about blue-chip stocks is that they are always in “growth mode.” Their prices keep climbing, and they have shown resilience even in bad times, or they have bounced-back after getting hit by the crisis.
Blue-chips stocks are always in the list of famous market indexes such as Dow Jones, Nasdaq-100, S&P 100, TSX60 (Canada), FTSE (England).
Traits of Blue-Chip Stocks
Blue chip stocks share common traits. Here are some of them.
1. Less Volatility
Blue-chip stocks have the tendency to be less volatile (rate of dispersion or variation in terms of prices or return securities) as compared to other commodities.
Stocks who have less volatility are always considered as secure investments as compared to others. They have the tendency to withstand the stock market crisis, or they are affected at the very least.
Lesser volatility means a smaller amount of risk. As an investor, you will definitely look up for securities with have lower volatility ratios, and blue-chip stocks are certainly one of those who offer this feature.
2. High Liquidity
One of the best things about blue-chip stocks is their high liquidity ratio (ability to convert into cash readily). The main reason for that is their trade frequency is very high as compared to other stocks. If you are in need of money urgently and you want to sell your blue-chip shares, you can find buyers instantly. If you’re going to buy them, you can purchase sellers with such ease.
3. Regular Dividends
Every investor invests in stocks with the purpose of earning profits (dividends) and stock growth. Blue-chip stocks possess both qualities. These stocks often yield dividends at a higher rate, as well as market growth for stocks.
One of the main reasons for paying regular dividends is that these blue-chip companies already have a significant market penetration that they do not need further investment to expand their operations. So, their substantial profits portions are divided into the shareholders.
Moreover, studies have shown that blue-chip corporations have a tradition of paying consistent as well as growing dividends.
4. Lesser Vulnerability
As discussed earlier, companies having blue-chip status, have large market capitalizations are stronger financial histories. They have this tendency of withstanding financial or economic crisis, or they can bounce back from weaker positions. This has been proven again and again over time.
One of the main reasons for this is, these companies are “household” names, and they have a market penetration to an extent where they are in a position to lead the market or their respective industries.
Benefits of Investing in Blue-chip Stocks
Following are the key benefits of investing in blue-chip stocks.
1. Portfolio Diversification
It has been said again and again, “do not put all your eggs in one basket.” As an investor, you must think about the risk factors attached to your investment portfolio. Investing in multiple companies or even multiple industries can reduce the risk factor significantly.
Talking about risk diversification, investing in blue-chip stocks can reduce that risk factor to a greater extent. But investing all your money in blue-chip stocks is not a wise thing to do either.
Blue-chip companies are considered as “safe havens” even in the worst of the times. It does not mean that they can never face downfall. There are some cases like “general motors” and “Lehman Brothers”. These were blue-chip companies, yet they went bankrupt, but these are rare examples.
In general, blue-chip stocks are safe as home, and a blend of other stocks and blue-chip stocks can make a vast portfolio for your investments.
2. Regular Returns on Investment
An investor always has two motives when they think of investing in stocks. One, getting regular dividends. Second, the growth of the shares (appreciation in stock’s value).
If you are looking for a regular income to cover up your routine expenses like college fees, home rent, bills, or taxes, then you need to invest in stocks that offer regular dividends, and blue-chip stocks are renowned for paying dividends at regular intervals.
Not only these stocks yield profits, but their return rates also keep increasing. This is one of the best ways to keep up with inflation.
3. Long-term Investment
Imagine if you want a peaceful and financially secure life after your retirement, or you are thinking of buying a home or any other property in the future. How can you achieve your financial dreams if you do not have much investment?
You will need to invest in such a way that your investment keeps growing at a required pace so that you can have enough amount in the given time. One of the best options you can have is investing in blue-chip stocks.
Not only will it yield a higher rate of return, but its value will keep appreciating over time at a faster pace. You might be able to sell your blue-chip stocks at 1000% higher prices in twenty or thirty years. This can also help you counter inflation.
4. Stability
Blue-chip stocks offer security. For instance, if you are going to invest in stocks for the first time and you are not sure where to invest or you do not have sufficient knowledge about how the stock market works. Then, blue-chip shares investment can be a very suitable option for you.
These stocks provide a sense of stability, security, and a higher return ratio. Your investment will be safe even in dark economic situations as blue-chips stocks can combat these kinds of adversaries due to their market share and capitalization.
Moreover, they offer high liquidity. You can sell them for good money whenever you want, and vice versa.
What to Consider Before Investing in Blue Chip Stocks?
Before you jump into investing in blue chip stocks, it is important to consider a few key factors:
- Financial Health: Take a close look at the company’s financial statements to assess its overall stability.
- Growth Potential: Explore the company’s plans for future expansion, innovation, and product development to get a sense of its growth opportunities.
- Performance History: Investigate how the stock has held up during previous market downturns to gauge its resilience.
- Dividend Yield: Compare the dividend yield to other blue chip stocks and fixed-income investments to see how appealing it is.
- Economic and Market Trends: Consider broader economic conditions and sector-specific factors that could impact the stock’s performance.
- Stock Valuation: Check the stock’s valuation metrics, such as the price-to-earnings (P/E) ratio, to ensure you’re not overpaying.
By carefully reviewing these elements, you will be in a better position to make informed investment decisions.
Some Famous Blue-Chip Stocks
- Intel Corporation
- Johnson and Johnson
- Apple Incorporation
- Berkshire Hathaway
- Anthem Incorporation
- The Coca-Cola Company
- Yahoo
- The Walt Disney Company
- IBM Corporation
- Microsoft
- Amazon.com Incorporation
- Boeing Corporation
- Exxon Mobil
Top 10 Blue Chip Stocks
It is hard to rank blue chip stocks as the numbers change often. However, here are the top 10 blue chip stocks to invest in.
- Airbus EADSY
- Anheuser-Busch InBev BUD
- Comcast CMCSA
- Nike NKE
- Nestle NSRGY
- Pfizer PFE
- Roche RHHBY
- Sanofi SNY
- Sony SONY
- Taiwan Semiconductor Manufacturing TSM
Frequently Asked Questions
What are blue chips in stock?
A blue-chip stock is a share in a well-known and successful company. These stocks are usually from large companies that are listed on major stock exchanges and have a strong track record of steady growth and regular dividend payments.
What is the difference between red chip and blue chip stocks?
Red chip stocks, in contrast to blue chip stocks, might offer more chances for growth but also come with higher risks. These are shares in companies that are directly controlled by the government or local authorities, and their stocks are registered and listed in foreign markets.
How Many Blue Chip Stocks Are There?
There isn’t an official list of blue chip stocks, but many investors see the companies in the Dow Jones Industrial Average as some of the best blue chips. This index includes 30 companies, so you could say there are 30 blue chip stocks by this definition.
Summing it up
The bottom line is, blue-chip shares are considered as a safe and sound investment. As an investor, if you are looking for dividends as well as market growth for your investment, then investing in blue-chip stocks will be a highly recommended option for you.
However, if you are thinking of investing all your money in blue-chip stocks, that is not a wise plan either. You can invest in new companies with the potential to grow and penetrate the market. It can be risky, but it is a rewarding adventure, and counter that risk factor, blue-chip stocks are always there.
Also, read the greatest bulls and bear markets in history.