The expression blue chip often comes up when talking about stocks. But what exactly does this term mean? Well, blue chip stocks are those that are issued by established and very large companies, those that have a long history and a solid reputation. So what are the advantages and risks involved in investing in this product and above all how to choose these shares today?
What does the term blue chip mean?
The word blue chip comes from poker and indicates the chips to which the highest value is attributed. The less precious ones are the white ones, while the red ones are the intermediate ones.
This term is also used as a terminology on the stock market where blue chip shares are considered among the safest investments because the securities are issued by large companies known for their reliability and stability over time.
For investors, purchasing them means exposing themselves to a more moderate risk as they invest in companies that distribute dividends regularly and whose stock prices are subject to smaller fluctuations than the market average.
What are the features
As explained, blue chip stocks are usually stocks of large, well-known companies both nationally and internationally that have stable results and a long history of growth.
The main characteristics of the latter are:
- strong financial stability;
- the high market capitalization;
- the distribution of dividends;
- the solid reputation.
We speak of strong financial stability when a company:
- records constant income;
- has a low level of debt;
- has a regular cash flow.
These elements make shares less exposed to economic crises than those issued by smaller or emerging companies.
This solidity is also reflected in the market capitalization which in the case of blue chips is very high. Usually, in fact, these are securities issued by companies worth many billions of euros and which have prominent positions in the main stock market indices.
When talking about blue chip shares, another typical element is the regular distribution of dividends, that is, a part of the profits that is paid periodically by the shareholders. Very frequently, such companies also manage to increase dividends over time in such a way as to offer investors a form of constant income.
The profile of blue chips is also completed by the consolidated reputation of the companies that issue them as they not only have a stable presence on the market but also a long history. In fact, these are companies that over the years have been able to adapt to market changes and maintain investor confidence.
Enel, Eni or Intesa Sanpaolo in Italy, for example, are considered blue chips because they are large, have constant dividends and have a primary role in the nation’s economy.
What are the benefits and risks
The first advantage of investing in blue chip shares is the greater stability since the securities, as we have explained, are issued by consolidated companies and are therefore less affected by short-term declines.
Furthermore, investing in such stocks could prove to be a good idea if you think about the future due to the fact that growth is constant over time.
However, there are also disadvantages and the first concerns the growth potential. The latter, in fact, can be lower than that of emerging companies and the reason is that large companies, being already consolidated, have a reduced surprise effect.
Furthermore:
- the price may be higher than that of other shares, thus reducing the margin of advantage;
- they are not immune to crises as even large companies can suffer damage in extreme cases;
- the efficiency effect is already taken for granted as the market often prices in advance what good a company can do.
Precisely for these last reasons, a winning strategy could be to diversify the portfolio and not focus only on blue chip shares.
How to choose blue chip stocks
To choose which blue chip shares to invest in today, you need to follow some important criteria:
- evaluate the financial strength of the company, i.e. cash flows, debt and profit;
- check that the company is truly a leader in its sector, that it therefore has a global presence and a strong brand;
- monitor the dividend and its sustainability;
- put the stocks you buy into a diversified portfolio as it is not a good idea to invest all the money you have in a single blue chip.
It is also important to check the indices in which the company is included. If it belongs to the most important ones, such as S&P 500 and StoXX50, it is as if it has received its quality seal. In fact, to enter these indices, the company must pass rigorous criteria on:
- liquidity;
- financial stability;
- size.
Among the best blue chip stocks of early November Dow Joneswhich is one of the main stock market indices in the world, there are:
- Travelers Company which recorded an increase of 2.41%;
- Merck which recorded an increase of 1.78%;
- Goldman Sachs which gained 0.94%;
- Visa which recorded an increase of 0.74%.
These positive performances also partly reflect the solidity of the respective sectors, namely insurance, pharmaceutical, financial and digital payments, which tend to resist better than others during periods of economic uncertainty.
The reason is that when the economy is bad, they continue to function reasonably well because they offer essential services.
In fact, people always need medicines as well as payment cards or insurance. Precisely for these reasons, the shares of these companies will tend to hold up better even when there is a crisis or uncertainty.
How to invest in blue chip stocks
Even if you are a beginner, it is not difficult to invest in blue chip stocks.
The simplest way is to buy individual shares but to do so you need to open an account at a financial intermediation platform. The latter is in fact used to buy and sell shares, funds, ETFs and other financial instruments.
After having carried out this operation you can search for the company you want and purchase even just one or some shares based on the capital you possess.
This type of investment could be the ideal choice for those who wish to gradually build a small personal portfolio and monitor the performance of securities in real time.
Another way is to invest in funds that pick up more blue chip stocks.
In this case, however, you do not purchase a single share but a share of an ETF or mutual fund. It means that you participate in the results of many large companies at the same time.
This solution is often considered safer if you don’t want to take too many risks or don’t have the time to monitor the market day by day. Furthermore, ETFs have lower management costs and can be sold and bought as easily as normal shares.
