What is a Blue chip?
Blue Chip Stocks: A publicly listed, well-recognized, stable, and financially healthy corporation on a national or worldwide level is referred to as a blue chip. Blue chips typically market well-liked, high-caliber goods and services.
Reputable brands that have been developed and preserved over many years are owned by blue chip firms. Their resilience to several economic downturns and this attribute make them reliable investments for a portfolio.
Blue-chip businesses make money even in challenging economic times. Their lengthy histories of steady and consistent growth are partly due to this.
Understanding Blue chips:
Oliver Gingold, a Dow Jones employee, coined the phrase “blue chip” in 1923 to refer to equities that were trading for $200 or more per share.
In relation to poker chips, the blue chips are the most valuable, followed by the white and red chips.
Blue chip stocks don’t always have to be expensive ones. They are shares of reputable businesses that have weathered the test of time and are in sound financial standing.
The most reliable market averages and indexes, such the Dow Jones Industrial Average, Standard & Poor’s (S&P) 500 and Nasdaq-100 in the United States, the TSX-60 in Canada, and the FTSE Index in the United Kingdom, typically include blue chip stocks. Typically, they are listed on significant stock exchanges like the Nasdaq and the NYSE.
One might argue over the minimum size required for a firm to be considered a blue chip. While corporations of different sizes might be market or sector leaders, a market capitalization of $10 billion is a commonly recognized benchmark.
Blue chip stocks may be preferred by many low-risk, conservative investors or those who are getting close to retirement. They can provide income and inflation protection in the form of steady dividend payments and capital preservation.
In his book The Intelligent Investor, Benjamin Graham advises conservative investors to seek for businesses that have paid dividends continuously for at least 20 years.
Large-cap blue chip firms in the S&P 500 that have raised dividends annually for 25 years make up Standard and Poor’s Dividend Aristocrat stock list.
Blue Chip Stock Examples
A global business that has been operating profitably for a number of years, is well-known and a dominant force in its field, might be considered a blue chip corporation.
Among the instances are:
- Coca-Cola
- shire Hathaway
- Amgen
- United Health Group
- Coca-Cola
- Proctor & Gamble’s Nike
- Chevron
- Walmart
- IBM
- Burger King Caterpillar
The poker game where blue chips have the highest value is where the term “blue chip” originates.
Features of High-Grade Stocks
Because of their notable institutional profile and established financial soundness, blue chip stocks are thought to be less volatile investments than shares of firms lacking this designation. They also have a few additional traits in common.
Because both individual and institutional investors often trade blue chips on the market, they have a high level of liquidity. Because of this, investors in need of cash may rest easy knowing that there will be purchasers for their shares.
Large market capitalization, a steady debt-to-equity ratio, minimal to no debt, and strong return on equity (ROE) and return on assets (ROA) are further characteristics of blue chip businesses.
Investment-grade credit has been bestowed upon blue chip stocks due to their strong balance sheet fundamentals and significant liquidity.
Although a stock does not have to pay dividends in order to be deemed a blue chip, the majority of blue chips have a track record of doing so.
Blue Chips: A Secure Way to Invest
Over the years, a blue-chip firm has likely weathered harsh market cycles and financial difficulties. It will have produced a consistent return and usually distributed dividends every year. As such, it may be seen as a secure investment.
But that doesn’t mean it’s impenetrable. Even the strongest businesses may falter in times of tremendous stress, as seen by the bankruptcy of numerous prominent European banks, General Motors, and Lehman Brothers during the global recession of 2007–2009.
Although they shouldn’t be the sole assets in a large portfolio, blue chip stocks might be suitable for its core holdings. A well-rounded portfolio often includes bonds and cash in addition to equities. The proportion of equities in a portfolio that is allocated to large-, mid-, and small-cap companies, as well as local and foreign stocks, can be diversified.
Because they have more time to invest and recover from market losses, younger investors can often accept the risk of holding a bigger percentage of their portfolios in growth companies that contain some blue chips. Investors nearing retirement age may decide to allocate a higher proportion of their assets to cash and bonds in order to preserve money.
Benefits and Drawbacks of Blue Chip Stocks
Benefits
- Low risk: Being well-established industry leaders with consistent cash flows and a track record of repaying loans makes blue chip corporations low risk. They are not likely to experience unexpected shortages of credit or liquidity. Consistent dividend payments and steady growth potential are characteristics of blue chip firms.
- Minimal volatility: Because of their proven business strategies, steady income streams, well-established operations, and enduring brands, blue chips are regarded as stable businesses or stocks.
- Less work: Because of their stability and less volatility, there may be less reason to worry and keep an eye on things.
Drawbacks
- Lower returns: While returns are dependable, smaller startups with potential for faster and more significant development tend to deliver more modest returns than well-established, mature corporations like blue chips.
- More costly: Due to their lower risk, consistent return potential, and less volatility, blue chips are typically more in demand and more costly than the stocks of other businesses of a similar size.
Advantage of Blue chip:
- Less risky than other stocks.
- Reduced turbulence
- Dependable dividends and returns
Disadvantages of Blue chip:
- Reduced returns compared to less well-established businesses
- Little space for expansion, hence significant benefits are unlikely
- Costly because to increased demand
The Blue Chip Stocks’ Safety
Because of their consistent financial performance throughout time, blue chips are regarded as secure investments. It’s possible that they have persevered through trying times and market cycles. Even the strongest businesses can struggle—and even fail—during times of tremendous stress, as seen by the bankruptcy of General Motors, Lehman Brothers, and several other prominent European banks during the worldwide crisis of 2008.
Buying Blue Chip Stocks: A Guide
Through a broker, investors may purchase individual blue-chip stocks. By purchasing a fund that focuses on large-cap firms or industry leaders, they can also make an investment in blue-chip stocks. Even though many of these businesses are regarded as blue chips, investors might also benefit from being exposed to other businesses.
To gain exposure to a full portfolio of blue chip stocks with a single investment, investors can also purchase mutual funds and exchange-traded funds (ETFs) that are designed to expressly target blue chip businesses. The majority of asset managers, such as Fidelity and BlackRock, provide one or more blue chip-focused funds.
How Can Blue Chip Stocks Be Invested in?
Blue chip equities can be purchased through stock brokerages like Charles Schwab or Fidelity. Just use the broker’s stock screener to look for the company’s ticker symbol. It is simple to invest in a basket of blue chip businesses since many asset managers also manage mutual funds or index funds that are dedicated to investing in blue chip stocks.
Which Blue Chip Stocks Are They?
Blue chip stocks are frequently exemplified by industry giants such as IBM, Coca-Cola, and McDonald’s. These businesses have a history of consistent growth and little volatility, which suggests that they won’t likely have significant issues very soon.
A big market capitalization, a high credit rating, and listing on the New York Stock Exchange (NYSE) or another major stock exchange are characteristics of blue chips. They frequently appear on listings of large-cap stocks and in key stock market indices.
A Blue Chip NFT: What Is It?
A blue chip non-fungible token (NFT) is a digital item or artwork that is distributed by a reliable participant in the non-fungible token market. These businesses are viewed as less hazardous than some of their more recent competitors since they are comparatively well-established in the NFT market. Applying the blue chip designation to such a speculative commodity, meanwhile, could be a stretch given the volatile nature of the digital asset market.
Where Is the Name of Blue Chip Stock Originated?
The phrase “blue chip” originates from the poker game, where the most valued chips on the table are often blue ones. Oliver Gingold, a Dow Jones employee, utilized it for the first time after seeing that several equities consistently traded over $200 per share. In the 2020s, several blue chips sell for thousands of dollars per share.