What are Blue Chip Stocks?

What are Blue Chip Stocks?


08 Apr 2019

The term "Blue Chips” is often used to describe shares. However, many people do not know what blue chips shares actually are. In this article, we will look at the features of blue chip shares, at some examples and will discuss all the different ways to trade them.

Table of Contents

Definition - What are blue chip shares?
Some examples of blue chip shares
The pros and cons of investing in blue chip shares
How to invest in blue chip shares?
Summary

Definition - What are blue chip shares?

Although there is no precise definition of what blue chip shares in fact are, the term is used to refer to the shares of well-established, profitable and big companies. In general, these are companies that have existed for a long time, offer well-known products and brands, and represent the market leaders in their respective industries. In addition, quite often such companies are multinational corporations with branches in many countries around the world.

The term "blue chip" has actually been borrowed from poker, because the blue poker chips have the highest value. The term was first used in the 1920s to refer to the shares of big, well-established and profitable companies.

Most blue chip shares are constantly increasing in value and are considered to be stable/ In addition, they offer attractive dividend yields. They are different from speculative shares, many of which are volatile and not yet profitable.

Finally, almost all blue chip shares are included in the major stock indices, such as the Dow 30, S&P500 and FTSE 100.

Johnson and Johnson 1970 to 2019 - A typical chart of a blue chip
*Johnson and Johnson 1970 to 2019 - A typical chart of a blue chip

Some examples of blue chip shares

Below you can find examples of well-known blue chip shares. This table shows a variety of shares in different industries that are considered blue chips. They are not necessarily the biggest or best blue chips, but a cross-selection of examples from different industries.

CompanyShare PriceMarket capitalization ( billions)
Microsoft$ 117.65$ 892
Apple$ 186.12$ 883
Amazon$ 1,761$ 852
Johnson & Johnson$ 137.60$ 369
JP Morgan$ 106.80$ 345
Exxon Mobile$ 80.87$ 343
Visa$ 154.59$ 336
Walmart$ 99.85$ 289
Bank of America$ 29.65$ 287
Pfizer$ 42.30$ 244
Merck and Co.$ 81.29$ 214
The Boeing Company$ 373.43$ 213
Coca Cola$ 45.46$ 196
Walt Disney$ 110$ 163
McDonald's$ 183$ 140
Starbucks$71.38$ 88

You will probably know most, if not all, of these companies. You might also notice that they are leaders in their respective industries, and most have been around for 40 years or even longer.

The pros and cons of investing in blue chip shares

The best-known brands that belong to the blue chip companies
*The best-known brands that belong to the blue chip companies

It is very rare that blue chip companies go bankrupt. This means that there is less risk that the share price of a blue chip will not recover after a price decline.

These are companies that have an already proven business model and have used their retained earnings to grow further. Most of them also have a big competitive advantage. This makes it very difficult for other competitors to encroach on their market shares.

Unlike blue chip shares, shares that are not considered blue chips are often traded at prices that reflect their future potential and not the actual balance profits. If this potential is not realized, the share price must adjust at some point.

Big institutional investors invest most of their funds in blue chip shares, and they like to buy when the prices fall. This reduces the volatility of these shares and increases their liquidity.

The biggest drawback of blue chips is that they do not grow as fast as smaller, fast-growing companies. Every year there is a group of shares (usually shares of companies in the technology industry) that outperforms blue chips, though this performance comes with increased volatility and risk.

Finally, some blue chip companies are going bankrupt. The reason could be due to changes in technology or consumption trends. Manufacturers of analog cameras and car manufacturers are examples of companies that are not what they used to be. Many traditional retail chains are currently in a downward spiral.

For this reason, potential investors should always ask themselves whether there will be such an industry in the future before investing in a company in this sector.

How do you invest in blue chip shares?

There are several ways to invest in blue chips. Besides actually buying the shares, you can also buy CFDs, futures, options and even binary options on the respective share.

Click here to learn more about trading with shares.

Buying and owning blue chip shares

The traditional approach to invest in blue chips is to actually buy the shares of them and own them over a long period of time. That's what Warren Buffet, the most famous investor in the world, is doing.

There are some pros and cons to this approach. When you own shares in a company that makes steady profits over time, the company will reinvest those profits. This can lead to bigger revenues for the company, so the numbers could really go up a lot by doing this.

In case the dividend yield increases over time, you will eventually earn a very nice income in proportion to the amount that you originally invested.

However, there are some cons to this approach. First, it is not as easy to pick shares that will continue generating profits over a long period of time. Not all blue chips always generate money for their investors. Polaroid and Kodak were both once considered to be blue chips, but both ended up in bankruptcy.

Second, while blue chip shares typically generate steady gains over time, their average yields are lower than what you would receive for fast-growing shares with a shorter time horizon or through active trading of blue chip shares.

Trading blue chip shares

Trading Blue Chip Shares

Active trading in blue chip shares can be very profitable, if done right. While the share price of blue chip companies is usually not that volatile, there are speculative shares, which carry a lot more risk.

The price movement of the share price of blue chips is also much more predictable. The shares of these high-quality companies are sometimes overbought and too expensive, which ultimately leads to a price decline. However, big institutional funds are always looking for blue chip shares if they can get them at good prices.

As a trader, you just have to wait for the price to fall low enough and then make sure that the buying volume increases and the price goes up. When you see a big trading volume, you know that institutions are buying at this price – and that means that the likelihood that the share price will fall further is now much lower. This gives traders an asymmetric bet, with limited downside risk but with significantly larger upside potential.

Smart traders can make big profits by switching from one blue chip to the next promising one. They buy them at a cheap price when they see an increased buying volume and then ride the trend until the price stops rising. Then they look for the next cheap blue chip share that they can buy.

Futures contracts

Futures are exchange traded derivative contracts that allow traders to leverage and to trade both long and short positions. Futures contracts can be traded on stock indices, commodities, bonds and even on big liquid blue chip stocks. They allow active traders to increase their position size without investing more capital. Of course, this kind of trading increases both the profits and losses. However, when you apply disciplined risk management, it can be more profitable than trading the share itself.

The downside of Futures contracts (in addition to the increased risk) is that the contract size is usually too big for most retail clients. In addition, an account with a dedicated Futures broker is required in most cases.

Contract for Difference (CFDs)

CFDs are another type of derivatives that are similar to Futures contracts, even though they are not traded on exchanges. CFDs can be traded directly with banks and brokers. In most other respects they are similar to Futures contracts, but have smaller contract sizes – they are often as small as a stock contract.

CFDs are ideal for retail clients and investors. They allow traders to leverage by trading on the margin and to trade both long and short positions. CFDs are therefore ideal for those who want to actively trade blue chip shares.

Exchange Traded Funds (ETFs)

ETFs are baskets of shares and are traded on exchanges, like the stocks they include. In most cases, an ETF tracks an index such as the Dow Jones Industrial Average, Nasdaq or FTSE 100.

Since most of the major stock market indices consist mainly of blue chip shares, ETFs offer traders a vehicle to trade a group of blue chips in just one shot. ETFs are less volatile and less risky than individual shares, but they can also be traded via CFDs and other leveraged derivatives.

Binary options

Binary options are also a kind of derivative, but they have limited risk in case you are the buyer. A binary option is like a bet on whether something will happen or not. It will either result in a big profit or become worthless. These instruments can be traded on different markets and over different time periods.

For those who like to bet on the share price of blue chips that they will reach a certain level at a given time or date, binary options should definitely be considered. However, caution and a reasonable risk management strategy are always advisable.

Summary

Blue chips can provide steady gains over time, but they also provide great trading opportunities for active traders. There are also many different instruments that can be used by traders to trade blue chips, depending on their personal style of trading.

Libertex is a broker and trading platform that offers CFDs on 50 American and European stocks, most of which are considered blue chips. In addition, clients can trade CFDs on commodities, indices, ETFs and cryptocurrencies with a leverage of up to 30. To try out what it is like to trade blue chip shares without risking actual capital, you can always open a demo account.

Why is it worth trading CFDs with Libertex?

Founded in 1997, Libertex is an international, trusted brand with more than 20 years of experience in financial markets and online trading, serving clients in more than 110 countries. Every year, the company consolidates its leading position both in the markets where it is already present and in new markets that it enters with its innovative products and services.

  • Licensed and regulated CFD broker
  • 2.2 million clients worldwide
  • 213 tradable assets
  • 27 countries covered
  • 30 international awards

Advantages of trading CFDs with Libertex

  • 213 tradable assets
  • Easy-to-use and convenient high-speed platforms
  • Leverage of up to 1:30 for retail clients and up to 1:600 for professional clients
  • 50% discount on commissions for new traders
  • Zero spread

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