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If you’re looking for safe, reliable, and profitable investment options, consider blue chip stocks. These companies are the hallmarks of their industries, offering low volatility and strong returns over the long haul.
If you’ve done any research on the stock market, you’ve heard the term “blue chip” and probably wondered what it means. Also, how did these stocks come by that nickname? Let’s dive in so you can get a better idea of the term and how it applies to investing.Wealthsimple offers an automated way to grow your money like the world's most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
What’s a blue chip stock?
Blue chip stocks aren’t the sports cars of trading. They’re the reliable four-door sedan with all the safety features that will protect you and your family.
The name “blue chip” originates from high-stakes poker, where blue-colored chips have the highest face value.
What are blue chip stocks?
Blue chip stocks are stocks from a company that has a long-standing reputation of quality, reliability, and the ability to operate profitably over many years. These companies tend to be household names.
General Mills, Apple, Google, and Disney are all blue chip stocks.
The performance of these stocks tend to follow a large-cap index like the S&P 500 or Russell 1000 very closely. But just because a company is a household name doesn’t make it automatically blue chip. For example, Apple was not given blue chip status until 2015.
Here are some traits that blue chip stocks have in common:
Stable growth rate: Stocks of well-established companies tend to have a strong long-term record of continued growth. They’re not as volatile as less established companies and command a large share of the market.
Large market cap: Blue chip companies tend to have large market values of $10 billion or more. This puts them in the large market cap category, which measures the size and value of a company.
Market index: The stocks of blue chip companies are usually part of a large market index such as the S&P 500 or the Nasdaq 100. Their value tends to follow the rise and fall of the market closely.
Many blue chip companies also pay dividends to investors, also known as blue chip dividend stocks. Dividends are regular payments from a company’s revenue. Since the companies are well-established, they do not need to invest as much back into their growth and instead can share profits with investors.
Blue chip vs penny stock
According to the Securities and Exchange Commission (SEC), a penny stock is a security issued by a company with small market value that trades for less than $5 per share. Some experts set the cut-off even lower: at $1 or less.
Since penny stocks have such a low value, they are often traded off major market exchanges. For example, Nasdaq has a rule that if a stock falls below a minimum bid price of $1 per share for 30 consecutive days, it risks being de-listed from the exchange.
In short, penny stocks are the opposite of blue chip stocks. They are issued by companies that have little or no financial history or may be close to bankruptcy. Investors who buy penny stock shares count on the company making a turnaround so they can get a return on the money.
In contrast, blue chip stocks offer steady earning results year after year. They won’t shoot up in value overnight but provide investors with a stable return on their money. Blue chip stocks’ household name status likely means continued demand even in down times.
But blue chip companies aren’t immune to economic conditions. The shares of any company, even established ones, can take a hit and lose value.
Even though investment firm Goldman Sachs (GS) is considered a blue chip stock today, it took a big hit during the Great Recession. It was part of the subprime mortgage crisis that led to the stock market crash of 2008, which caused its shares to lose value.
Should I buy blue chip stock?
If you want to balance out your portfolio by adding stable, safe stocks with a long history of steady growth, blue chip shares can be a good option. Even though these stocks are considered reliable, think twice before having all of your eggs in one basket.
No company is safe from market downturns or economic pressures. Just because a stock has offered steady returns in the past doesn’t mean it will continue to do so in the future. Do your research before spending any money buying individual stocks.
Most investors will do well with a diversified mix of investments that includes blue chip stocks as part of the overall portfolio and not the focus. (Wealthsimple Invest simplifies the process and makes it easy to get started.)
Buying blue chip stocks
Buying individual stocks, blue chip or not, takes time and research. Start by looking at the big players in the market: companies that have been around for decades and have weathered different market conditions.
Use the company’s 10K filing as a good starting point for information on past, current, and future performance. Review the company’s financials, growth over time, current outlook, and plans for the future.
When it comes to blue chip stocks, you can either buy individual shares of companies like Johnson & Johnson or Home Depot or go with an index fund. Blue chip index funds or exchange-traded funds (ETFs) follow the performance of a specific stock market segment.
Large cap index funds or ETFs are another good way to get exposure to blue chips in your investment portfolio. That’s because most blue chip companies have large market caps and would be part of those funds.
In addition, index funds or ETFs that track the S&P 500 or the Nasdaq 100 also include shares of blue chip stocks. Since these funds include other companies beyond blue chips, they can help you diversify your investments further.
The bottom line on blue chip stocks
Investing in blue chip stocks adds to your portfolio companies that offer safe, stable, and reliable returns over the long term. They are not “flashy,” but many pay dividends to investors every quarter.
Note: A stock’s blue chip status doesn’t mean it’s immune to market conditions or economic downturns. Never put all of your eggs in one basket but consider adding blue chip stocks or funds to your investment portfolio.
What are Blue Chip Stocks? FAQ
Blue chip stocks represent stocks from a company that has a long-standing reputation of quality, reliability, and profitable operations over many years. These companies tend to be household names in their industries.
If you have access to any major online brokerage platform, you can place orders for blue chip stocks. Before making your purchases, research the blue chip stock(s) that interest you, the amount you’ll invest and how often you’ll invest. Then, place your orders according to the plan you’ve set for investing in blue chip stocks.
You should invest in blue chip stocks much like you would with any other stock. You should understand the company and business model of the entity the stock represents. Check all relevant information such as financial statements, historical earnings, and how the company compares to its competitors. Once this analysis is complete, you can determine whether or not this particular blue chip stock constitutes a good investment based on your financial goals.
The position for top blue chip stocks can change on a daily, weekly, monthly, or yearly basis because of the changing nature of company dynamics. One quarter, sales could be high, while another quarter, debt could be low. By the end of the year, sales could be low and debt could have skyrocketed.
In other words, a well-performing blue chip stock could slip, or even become more valuable as time passes. For this reason, it’s hard to pinpoint, at a single point in time, a top-performing blue chip stock. However, a good method to find good-performing blue chip stocks would be to track dividend aristocrats. These are companies that perform well enough to pay dividends to shareholders.
There are “cheap” blue chip stocks, but the way to determine how cheap a stock is doesn’t always mean a stock is priced well. For instance, a company could be saddled with unsustainable debt and dismally low cash flow, trading at what seems to be an affordable price—say, the sub-$100 range.
Instead of looking solely at price to determine if a stock is cheap, another measure of value could be the P/E or price to equity ratio. This ratio compares a company’s share price relative to its earnings per share. Most established, popular blue chip stocks have P/Es in the range of 10 to 30. (Value investors would tend to be more interested in stocks with P/Es of 10 or under.)
By the time this post goes to publication, or when you read it, the prices of blue chip stocks may have changed dramatically. It’s not always easy to pinpoint a falling stock price, as it can change rapidly based on both micro- and macro-economic factors.
To buy a blue chip stock at the best price, create a watchlist and then an alert when the price drops to what you want to pay. You can place an order at the price you feel makes the purchase a good buy.
There’s no official directory of blue chip stocks, but the highest regarded list is the companies that are a part of the Dow Jones Industrial Average. This list is made up of 30 companies.
Blue chip stocks are generally regarded as low-risk investments. Though you can lose money with any stock, these stops tend to appreciate over much longer periods of time. Though safer and low-risk, you should also expect much slower growth and appreciation of blue chip stocks. There is a trade-off between faster growth and appreciation as you invest in blue chip stocks.
This all depends on your financial goals. Investors nearing retirement age tend to invest more in blue chip stocks, as they are relatively stable and tend to hold their value.
If you are young and can tolerate more risk, you might invest a minimal amount in blue chip stocks and more in relatively volatile equities like tech stocks. In general, blue chip stocks are thought to be good investments, but how much of your portfolio will be in these stocks depends on what you need out of your investing strategy at the moment.
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