What is Blue Chip Shares?

The term “blue chips” is often used to describe shares. However, many people do not know what Blue Chips Shares are. This article explains the features of blue chips shares.

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 stocks of large, established and profitable companies.

Definition – What are Blue Chip Shares?
Some examples of blue chip shares
How do you invest in blue chip shares?
Trading in blue chip shares
The pros and cons of investing in blue chip shares
Summary

Blue Chip Shares

Definition – What are Blue Chip Shares?

Although there is no exact definition of blue chip shares, the term refers to stocks of established, profitable and large companies. Typically, these are companies that have long existed, offering well-known products and brands, and representing market leaders in their respective industries. In addition, such companies are often multinational companies with offices in many countries around the world.

Most blue chip stocks are rising steadily and are considered stable / In addition, they offer attractive dividend yields. They are different from speculative stocks, many of which are volatile and not yet profitable.

After all, almost all blue chip stocks are included in major stock indices such as blue chips shares

Some examples of blue chip shares

Below are examples of known blue chip shares. This table shows a large number of shares in various industries that are considered blue chips. They are not necessarily the biggest or best blue chips, but a selection of examples from different industries.

Company Share Price Market 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 may also notice that they are leaders in their respective industries and most of them have existed for 40 years or more.

How do you invest in blue chip shares?

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

Buy and own blue chip shares

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

This approach has some advantages and disadvantages. If you own stakes in a company that consistently returns over time, the company reinvests these gains. This can lead to higher sales for the company, which could significantly increase numbers.

If the dividend yield increases over time, you will ultimately earn a very good income in proportion to the amount you originally invested.

However, this approach has some disadvantages. First, it’s not so easy to pick stocks that continue to generate profits over a long period of time. Not all blue chips always generate money for their investors. Polaroid and Kodak were once considered blue chips, but both went bankrupt.

Second, while blue chip shares tend to make steady profits over time, their average yields are below those you would get for fast-growing stocks with a shorter time horizon or active blue-chip trading.

Trading in blue chip shares

Active trading in blue chip shares can be very profitable if done correctly. While the share price of blue-chip companies is generally less volatile, there are speculative stocks that carry a much higher risk.

The price movement of Blue Chips’ stock price is also much more predictable. The stocks of these high-quality companies are partly overbought and too expensive, which ultimately leads to a price decline. However, large institutional funds are always looking for blue chip stocks if they can get them at good prices.

As a trader you just have to wait until the price is low enough and then make sure that the purchasing volume increases and the price goes up. If you see a large volume of trading, you know that institutions are buying at this price – and that means that the likelihood of the stock price falling further is now much lower. This gives the traders an asymmetric bet with a limited downside risk but a much higher upside potential.

Smart traders can make big profits by moving from one blue chip to the next, which is promising. They buy them at a low price if they see a higher purchase volume, and then follow the trend until the price does not rise. Then they look for the next cheap blue chip stock they can buy.

Futures contracts

Futures are exchange-traded derivatives contracts that allow traders to use and trade long and short positions. Futures contracts may trade in stock indices, commodities, bonds and even large liquid blue-chip stocks. They allow active traders to increase their position without investing more capital. Of course, this type of trade increases both profits and losses. However, using disciplined risk management can be more profitable than trading the stock.

The disadvantage of futures contracts (in addition to the increased risk) is that the contract size is usually too large for most private 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, although they are not traded on stock 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 private clients and investors. They allow traders to leverage by trading in the margin and trading both long and short positions. CFDs are therefore ideal for those who want to actively trade blue-chip stocks.

Exchange Traded Funds (ETFs)

ETFs are equity baskets and are traded on exchanges like the shares they contain. In most cases, an ETF will track an index such as the Dow Jones Industrial Average, Nasdaq, or FTSE 100.

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

The pros and cons of investing in blue chip shares

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 a proven business model and have used their retained earnings for further growth. Most of them also have a big competitive advantage. This makes it very difficult for other competitors to intervene in their market shares.

Unlike blue-chip shares, stocks that are not considered blue-chip stocks are often traded at prices that reflect their future potential rather than actual balance sheet gains. If this potential is not exhausted, the stock price must adjust at some point.

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

The biggest drawback of blue chips is that they do not grow as fast as smaller, fast growing companies. Each year, there is a group of stocks (typically stocks in technology companies) that perform better than blue chips, although this performance is associated with increased volatility and increased risk.

Finally, some blue chip companies go bankrupt. The reason could be a change in technology or consumption trends. Manufacturers of analog cameras and automakers are examples of companies that used to be what they were. Many traditional retail chains are currently in a downward spiral.

For this reason, potential investors should always ask themselves if such an industry will exist in the future before investing in a company in this industry.

Summary

Blue chips can grow steadily over time, but also offer great trading opportunities for active traders. There are also many different tools that Trader Blue Chips can trade with, depending on their personal trading style.

Libertex is a brokerage and trading platform that offers CFDs on 50 US and European stocks, most of which are considered blue chips. In addition, customers can trade CFDs on commodities, indices, ETFs and cryptocurrencies with a leverage of up to 30. To test what it’s like to trade blue chip stocks without jeopardizing the actual capital, you can always open a demo account.


Blue Chip Shares

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