Stock markets can be complex. And if you feel lost in the jargon from the investing world, don’t worry, you’re not alone. Many newcomers are easily put off due to how difficult investing seems, or end up placing their trust in an expensive financial adviser to handle their money for them.
But you should really be aiming to understand your own investments. Because beyond all of the investing jargon and influx of information, much opportunity awaits you. Specifically, the chance to be in control of your own financial future.
The term ‘blue chip’ is one of the most frequently and widely used in the investing world. Below we’ll explain what blue chips are, some of the reasons you may want them in your portfolio, and also some of their risks.
Please be aware that the information below does not take into account your personal circumstances, and shouldn’t be considered a recommendation. Our editors regularly recommend shares in our premium publications, which sometimes include blue chips, but the information in this article is purely educational. Therefore, you should seek independent financial advice in addition to reading educational information.
What is a blue chip company?
Blue chips are large corporations which are well-established and financially secure. Because blue chip classified companies are often household names, their size and dominant positions give them a reliability that small- and mid-cap stocks do not offer. For those unaware, small-cap and mid-cap refers to the size of a company’s value on the share market, or capitalisation; large companies like blue chips are also called ‘large-cap’.
Blue chip’s strengths
Blue chips are the most owned shares on the market. They are considered a safe purchase as their ongoing success is almost guaranteed. They’re usually at the top of their sector and are best identified by a market capitalisation in the billions.
Investors can be tempted to own blue chip shares as they often pay out most of their profits to their shareholders (in the form of dividends). But because of their strong position and size, it can sometimes mean they don’t want or need to spend the profits on growth. So you may not be receiving too much in the way of capital growth in your investment. But if you’re satisfied with holding a share for the long-term income, blue chips could be a good option.
One of the ideal reasons to invest in blue chip stocks is that they generally aren’t affected by minor downfalls, market disruptions, or even major shifts in the economy. Let’s use The Coca-Cola Company for example. They are a multinational blue chip company with a reputation so strong that it’s overcome any challenge placed in front of them.
The company has grown exponentially (until recently) since its inception in 1886, despite the many years of revolt against ‘sugary drinks’ in the media. Aside from reporting a slight slip in sales in 2017, Coca-Cola have continued to remain well positioned by offering ‘no sugar’ options, introducing new drink inventions, and exercising new marketing strategies. Ultimately, Coca-Cola is the king of soft drinks. This is demonstrated by the fact that no matter where you are in the dining world, you will find a menu listing for, or a place selling, coke.
The reliability is deeply rooted in the flavour of the drink, and in the warm familiarity of the brand name — and that’s exactly why people buy these kinds of shares.
As blue chip shares are the biggest and most dominant companies in the market, they are a good investment due to their continuing record of ongoing success. And with cash and profits available to save them from any possible threat, blue chip stocks are the safety net investors look for to improve their long-term portfolios and to pick up profits.
Blue chips have their downfalls too
Blue chips could potentially be considered as guarded investments because of their continuous cash flow, and the billions of dollars that back up their already established businesses. This, amongst other reasons, is why blue chips are some of the most popular to investors.
As previously mentioned, blue chips are reliable but this doesn’t make them the most profitable sector in the market. Large corporations like Coca-Cola aren’t likely to double their value in a short period of time. In fact, it’s highly unlikely to see even a fraction of that increase in that timeframe.
And just because blue chips are the biggest companies (usually with a dominant position over their competitors) isn’t to say that they can never fail. Major economic crises can devastate the value of whole sectors, where even the biggest companies aren’t safe. Nor are they unsusceptible from what other corporations face when it comes to changing times, technology or simple mismanagement. Any corporation could struggle to adapt to these, which can seriously affect the corporation.
It’s important for you to know that regardless of their place in the market, you can never assume that any investment, no matter how stable, is ‘safe’. Always seek independent financial advice to assist you in making the right decision.
Investing in blue chip stocks can be a way to enter the markets. These companies are usually the most insulated from volatile markets and major economic shifts. However, they are not completely exempt to the risks that are associated with investing. So you should approach blue chips with the same level of caution and research that you would with any investment.