What are blue chips and why invest in them

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

This is a great investment option for those who are just trying to buy stocks.

What are blue chips

Blue chips are the shares of the largest stable and reliable companies, as well as these companies themselves. This name came from the casino. When playing poker, blue, red and white chips are commonly used. Blue are the most valuable. It is the same with shares: they are considered the highest quality and most desirable for investors.

First, the blue-chip companies are well-known, sustainable brands, as a rule, the leaders of their industry. Secondly, we are talking about issuers with a high capitalization.

Vladimir Maslennikov Vice President of QBF

Capitalization is the value of all shares in a company, that is, the product of their quantity and price. The high value of the securities does not necessarily indicate the reliability of the company, as the share price may rise in anticipation of future profits. But blue chips have a feature that promises some kind of stability.

They have a capitalization in the billions of dollars and huge assets that provide some kind of "insurance" that the price of their shares will not go down to zero.

Vitaly Kirpichev Development Director in Russia TradingView, Inc.

Blue chips are traditionally used to assess the overall situation in the stock market. They set the trend for a decrease or increase in prices.

What are the advantages of blue chips

Higher liquidity

Blue chips are distinguished by a large number of transactions with their participation during the day and a narrow spread, that is, the minimum difference between the buy and sell prices. It is easy to sell such shares at any time - there will be many who want to buy them. Moreover, you are unlikely to lose much money, even if you choose the wrong time to sell.

Volatility is lower

The price of blue chips is less volatile and relatively stable even during periods of negative trends in the securities market. This is due to the reliability of the companies that issued them. The share price depends on the financial performance of the business, and not on the momentary mood of speculators.

There are dividends

Fresh fast-growing companies are determined to invest their profits in further development. Therefore, they often do not pay any dividends, hoping that shareholders will earn on the increase in the value of securities.

Blue chips can hardly count on explosive growth. But they did take place, conquered the market and receive a stable profit, which they share with the shareholders. This does not mean that all blue chips pay dividends. But in most cases, you can count on regular payments.

Reliability

A large, stable company has a lower risk of bankruptcy or getting into any kind of trouble. Of course, we can say that the huge Titanic also sank, but the blue chips are rather an iceberg in the business world.

They are less susceptible to the effects of panic. When investors suddenly start selling stocks, stocks tend to drop sharply in value, and blue chips tend to be held back to the last.

What are the disadvantages of blue chips

Little profit potential

It is hardly worth counting on the fact that stocks will skyrocket in price. There is simply no reason for this - the company has already conquered the market and acquired a reputation. Now the price change is happening at a calm pace.

The reason is very simple: in most cases it is difficult for blue chips to expand their business. To do this, they need to either absorb competitors, which may end up with an investigation by the regulators, or enter new niches, which, for example, Yandex and Sberbank have been doing in recent years.

Igor Kuchma is a financial analyst at TradingView, Inc.

Volatility is lower

Yes, it didn't seem to you. You've already seen this point in the benefits. Low volatility will be a problem for those who seek to make money on the difference in rates, and do not count on a long game.

Is it worth investing in blue chips?

Blue Chips are a good choice for those who want to invest for a long time and have little or no worries about them. With a high degree of probability, such stocks will grow steadily, albeit not as quickly as in the case of a successful startup.

Blue chips have many advantages, but this does not mean that you can turn off your head and not analyze anything.

Do not believe that such companies will not bring you losses and grow forever. In the early 2000s, Fortune's most innovative company in America, the energy concern Enron, was considered a great blue chip. However, then due to fraudulent accounting reporting, the company collapsed and was declared bankrupt. Investors have lost a lot of money. Therefore, you always need to be careful and distribute your funds among the many "chips" if you decide to invest in the stock market.

Vitaly Kirpichev TradingView, Inc.

How to invest in blue chips

As with other securities. You can become a blue-chip owner in three ways.

1. Buy stock

To purchase securities of a company you are interested in, you need to open a brokerage or individual investment account. You can then both buy and sell stocks.

2. Invest in ETFs

ETF (exchange-traded fund) is an exchange-traded investment fund. This is a portfolio of securities formed by someone, a share of which can be purchased. You just need to find a suitable one, in this case - filled with blue chips.

ETF units are traded like regular stocks, so you need a brokerage or individual investment account to buy.

3. Buy a mutual fund share

A mutual investment fund (MIF) is similar to an ETF. This is also a portfolio of securities formed by the management company. And it can also be made up of blue chips. Only you will have to acquire your share through this very management company.

Which companies are considered "blue chips"

To answer this question, it is worth referring to the various ratings. For example, the Moscow Exchange calculates the blue-chip index based on the shares of the 15 largest Russian companies. The list includes:

1. X5 Retail Group (retail chains Pyaterochka, Perekrestok, Karusel and Chizhik).
2. Gazprom.
3. Norilsk Nickel.
4. Lukoil.
5. Mail.ru Group Limited.
6. "Magnet".
7. "Mobile TeleSystems".
8. Novatek.
9. "Pole".
10. Polymetal.
11. Rosneft.
12. "Sberbank".
13. Surgutneftegaz.
14. Tatneft.
15. Yandex.

Or there is, say, the Dow Jones Index, which is calculated based on the stocks of the 30 largest American companies. Among them are Apple, Boeing, Coca-Cola, McDonalds, Procter & Gamble and others. But the list of American giants is not limited to this thirty, there are hundreds of them.

If you want to find blue chips yourself, you can use stock screeners like Finviz, Zacks or. And already in them, select the necessary companies by capitalization, the period during which the shares are traded on the market, dividend yield. As a result, you will receive a list of large and stable companies that have been working for a long time and in whose shares you can invest if you want to invest for a long time and are not ready to take risks.