Simply put, blue-chip shares or blue-chip 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 associates with these 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 blue-chip term:
Blue-chip first uses in 1923 by an employee (Oliver Gingold) of the famous “Dow jones.” He observes a trend that some specific stocks trade’s regularly at a rate of 200$ per share or sometimes even more than that. The idea took from poker chips used by gamblers while playing poker. Those chips are of three colors, red, blue, and white. While blue-chip holds the most significant or highest value in poker. That’s how the term “blue-chip” evolves. 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 list of the blue-stocks company. Yet, corporations whose total capitalization is not less than $5 billions are considered as blue-chip companies, while some categories require the minimum capitalization amount to be at least $10 billions. However, there are some companies with a capitalization value lesser than $5 billions. And still, they considers 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, 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:
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.
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.
Every investor invests in stocks with a purpose to earn 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 to pay consistent as well as growing dividends.
Lesser Vulnerability to the crisis:
As discussed earlier, companies having blue-chip status, have large market capitalization’s 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:
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.
An investor always has two motives when he thinks 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.
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 keeps 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 the inflation issues.
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.
Some famous blue-chip stocks:
- Intel corporation
- Johnson and Johnson
- Apple Incorporation
- Berkshire Hathaway
- Anthem Incorporation
- The Coca Cola Company
- The Walt Disney Company
- IBM corporation
- Amazon.com Incorporation
- Boeing Corporation
- Exxon Mobil
- Berkshire Hathaway
- Alibaba Limited
- ABBVIE Incorporation
- Johnson and Johnson corporation
- Facebook incorporation
- McDonald’s Corporation
- Duke Energy corporation
- British American Tobacco
- Dollar General corporation
- Novartis International
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. But, if you are thinking of investing all your money in blue-chip stocks, that is not a wise plan either. You can invest 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.