The word "blue chip" is originated from Western casinos. In western casinos, there are three colors of chips, of which blue chips are the most valuable, red chips are second, and white chips are the worst. Investors apply this jargon to stocks to describe the largest public companies by size or market capitalization. These companies can still make some gains even in a recession, so conservative investors can consider investing in these stocks.
Characteristics Of Blue Chip Stocks
Blue chip stocks refer to the stocks issued by large companies with good management and stable development. These companies have stable profitability and generous dividends. Blue-chip companies have high market share, strong capital, and good cash flow. In general, blue chips are less volatile, but market turmoil also has a big impact on blue chip stocks. Usually the market performance of blue chip stocks is closely related to the market index.
Many blue chip stocks are issued by big household names such as Industrial and Commercial Bank of China, Vanke, Kweichow Moutai, and China Unicom. Of course, there are also some little-known companies, such as Zhenhua Port Machinery and Conch Cement. Maybe you have never heard the names of these companies, but they are indeed blue chip stocks with real value.
Advantages of Blue Chips
Blue chip companies typically have mature business models with steady growth and ample cash flow, but are slow to grow. Investing in blue chips helps to preserve the value of assets and yields continuous dividend income. It not only brings stable income to investors, but also helps to overcome the impact of inflation. Blue chip stocks are highly liquid. They are widely held by individuals and corporate institutions and perform relatively consistently even during recessions. Therefore, for stock investment, blue chip stocks can be regarded as a relatively safe investment choice.
Disadvantages Of Blue Chips
While blue chip stocks are relatively stable, their downsides are slow value growth and low returns. If investors are willing to take greater risk, investing in growth stocks and real estate stocks can yield better returns. Also, blue chip stocks are generally more expensive. If you do want to invest in blue chip stocks, we recommend using them as a means of diversification to reduce overall portfolio risk.
How to Invest in Blue Chips
We can invest in blue chip stocks in several ways, starting with buying individual stocks directly through a broker. At this point you should follow a value investing strategy and try to buy them when they are below their intrinsic value.
An important characteristic of bluechip stocks is that the company will continue to pay out dividends regardless of the company's performance, and may even increase its dividend distribution.
Alternatively, you can invest in a basket of blue chip stocks by buying mutual funds and exchange-traded funds (ETFs). Some of these funds are named after "blue chip" funds, such as the Bridgeway Blue Chip 35 Index. In many economic sectors, people refer to this index, which has a daily return of 0.15%. Compared with the S&P 500, the Bridway Blue Chip 35 Index has a smaller share of consumer companies and a higher share of information technology companies. Although some other funds are not named after "blue chip" funds, they also hold a large number of bluechip stocks.
Blue chip stocks, mutual funds and ETFs are all good options if you want to invest in leading companies with stable operations and low volatility. They may not give you the big returns in the short term like growth stocks, but they can help you achieve your long-term investment goals with relatively little risk.