Blue chips: why to buy ‘elite’ shares
YEREVAN, 10 October./ARKA/. Investors, as a rule, seek to gain the highest profit at the lowest risk. Market leaders' shares are considered a relatively best and proven way to build up the portfolio. In the investment environment they are called ‘blue chips’. We will tell you about the features of blue chips, how to find them and what you should consider when buying them.
Blue chips
These are shares of large companies that have established themselves as long-standing leaders of the stock market. The name is borrowed from poker. There, blue chips are used for the biggest bets.
Blue chips include stocks of companies that have the following features:
- High market value (capitalisation) - the number of shares outstanding multiplied by the price. The conventional capitalisation threshold depends on the country. For example, in the US, blue chip issuers are usually companies with a market value of at least $10bn. However, status players with a smaller capitalisation are often included in this range.
- Established market positions. Companies have been operating for years and occupy a large share of their sector.
- Stability. Blue chip issuers maintain high financial performance over a long period of time, in some cases for decades. They are more resilient to market crises and recover more quickly. Therefore, blue chips are considered a relatively safe way to invest.
- Notoriety. Both newcomers to the stock market and those who have been investing in securities for a long time know about local market leaders and are interested in their securities. Businesses of such companies are large-scale projects that often play an important role for the national and international economy.
Pros of investing in blue chips
First and foremost:
- Reliability. Status issuers with well-established business processes are less likely to face the risk of bankruptcy than others. Often a significant part of the national budget is based on the profits of large companies in the industrial or agricultural sector. The state cannot allow such players to go into crisis and always supports them.
- Low volatility: speculation in the market has little impact on the price of blue chips. Accordingly, investing in them reduces the risk of portfolio drawdowns.
- High liquidity: blue chips are easy to buy and sell because they are chosen by many investors and funds.
- Dividends: Blue chip issuers are companies that have gained significant influence in their segment and have completed their growth phase. They consistently earn profits and send payments to shareholders.
Cons of investing in blue chips
- You should not expect the price of blue chips to increase many times over. The players issuing them have already taken the highest positions in their segment and have gone through a phase of rapid development. Among blue chips, technology stocks retain the highest growth potential.
- Dividends on blue chips are stable, but they are often lower than those on second-tier stocks. This is mainly true for technology companies, as they invest profits in their development.
- Blue chips in commodity-oriented markets are characterised by rather large dividends. At the same time, issuers are more exposed to external economic risks and may face international sanctions, which will negatively affect profits.
How to understand whether a stock is considered a blue chip?
To do this, you need to refer to status indices: Dow Jones in the US, Nikkei in Japan, FTSE 100 in the UK, MSCI Europe in Europe.
Also, some national exchanges create indices and websites that track the blue chips of the local market (Tokyo and Moscow exchanges).
The blue chips of the USA exactly include securities of companies that have been steadily paying and increasing dividends for decades: Dividend Achievers (10 years and more), Dividend Aristocrats (25 years and more) and Dividend Kings (50 years and more). You can find them by navigating special indices and websites. For example, the Dividend Aristocrats business is tracked by the SPDAUDP index.
There are securities screeners - sites where you can search for stocks according to the criteria you are interested in. In the case of blue chips, it is convenient to set parameters on capitalisation and the age of the company (20 years and more).
How to invest in blue chips?
Firstly, invest directly in shares of selected individual companies.
Secondly, buy a share of an ETF fund that includes blue chips
What are the nuances?
To access the securities of foreign companies, you may need a foreign broker and/or the status of a qualified investor.
The range of prices for securities of status issuers is quite wide. A share may cost from a few dollars to hundreds of dollars.
Conclusion
Investing in blue chips reduces investment risks due to low volatility and high liquidity of securities, as well as the issuers' resistance to downturns and “booms” in the market.
At the same time, the status and stability of companies builds a certain growth ceiling for them. Therefore, blue chips can hardly rise in price by times.
When choosing blue chips, investors often count on large dividends. However, they are not guaranteed and depend on the company's policy and market structure.
Buying blue chips is a good way to diversify your portfolio. But, like any instrument, such shares are not a universal solution for all financial problems.
This article was prepared within the framework of the joint project ‘The Year of Investing in Oneself’ by ARKA and AMI Novosti-Armenia news agencies and Freedom Broker Armenia.
