With markets open to fluctuations, many investors gravitate towards investments that offer “safety, stability, and resilience”, such as those known as “blue chip” stocks.
Blue chip stocks are renowned for remaining steadfast in adverse trading climates, maintaining their value and generating significant profits in both bull and bear markets.
They are predominantly found in mature investment sectors, such as bank equities and large-cap equities.
Today, blue chip stocks are accessible globally, making them an excellent investment option for new investors.
What is a ‘blue chip’ stock?
Blue-chip stocks are the shares of well-established, widely recognised companies with a long history of strong financial performance and a consistent record of paying dividends to investors.
These stocks are known for their ability to weather economic downturns and provide relatively stable returns over the long term.
Some examples of blue-chip stocks include Coca-Cola, Walmart, Nike, PepsiCo, Microsoft, Apple, Tesla and Johnson & Johnson.
History of term
According to what is described as “Dow Jones company folklore”, Oliver Gingold coined the term “blue chip” in the 1920s.
An employee of the company that would later become Dow Jones, Gingold, observing the ticker at Merrill Lynch, now the American investment and wealth management division of Bank of America, noticed that many stocks were trading at $200 or more per share.
Inspired by the high-value blue chips in poker, Gingold is said to have told a friend that he intended to write about these stocks, referring to them as “blue-chip stocks.”
The term quickly gained popularity and became synonymous with high-quality, well-established companies with a long history of financial stability and dividend payments.
Characteristics
Blue-chip stocks are popular among investors, particularly the more risk averse, due to their reputation for reliability and stability.
These stocks are typically included in major market indices such as the S&P 500, Dow Jones Industrial Average and Nasdaq 100, and they typically have a market capitalisation of $1 billion or more.
Three key characteristics distinguish blue-chip stocks:
1. Reputation: Blue-chip stocks are associated with well-established companies with a long history of success and a strong brand reputation.
2. Financial Strength: These companies typically have strong balance sheets, consistently generate revenue, and maintain healthy cash flows, indicating their ability to weather economic downturns.
3. Stability: Blue-chip stocks are less volatile and more stable than other types of stocks due to the size, diversification across industries and sectors and long-standing operating histories of the companies.
This stability makes them an appealing choice for investors seeking steady returns.
The advantages and disadvantages
| Blue Chip Stock | |
| Pros | Cons |
| 1) Low volatility | 1) Higher share price |
| 2) Low risk investment |
2) Slower growth, which can result in lower capital appreciation |
| 3) Pay steady returns and dividend yields to shareholders |
3) Moderate dividends as their yields may not always outperform the broader market |
| 4) Well regulated and governed, with reports proven to be accurate |
4) Conservative approach |
| 5) Blue-chip companies are often leaders in their respective industries |
5) Safe, but not 100 per cent immune from economic downturns |
References:
https://www.investopedia.com/terms/b/bluechipstock.asp;
https://www.investopedia.com/terms/b/bluechip.asp.
Prepared by: Department of Research, Training, Securities Market Development and International Relations, Securities and Exchange Regulator of Cambodia.
Email: [email protected].
Phone: 023 885 611.
