What Are Blue Chip Stocks?

A Blue Chip stock is the stock of an established company that is recognized, financially sound, and known to have a strong reputation for quality.

In the game of Poker, blue chips are said to have the highest value. It is on the basis of this that the term, “Blue Chip Stock” was born in the finance industry. A Blue Chip stock is the stock of an established company that is recognized, financially sound, and known to have a strong reputation for quality.

Companies as these have become household names and have been tried and tested over time. In terms of size, blue chip stocks top industry averages and typically have a market capitalization running into billions of dollars/Naira.

These companies know how to deal with downturns and still make their investors some money in the face of uncertainty or within bearish markets. All of these things are what contribute to their extensive record of reliable growth. Examples of Blue Chip stocks include IBM, Coca-Cola, and Yahoo.

So How Do Blue Chip Stocks Perform?

As a result of their steady pace, they typically do not experience extreme growth. To make up for their growth pace, they are very good at paying stable or rising dividends – albeit, while having a low dividend yield.

Just by looking at the kind of companies mentioned, you can bet that the stocks are normally expensive. But, because of their experience and market leadership, their stocks are seen as less volatile investments as compared to owning shares in companies without blue chip status. ]

The stocks are relatively safer investments, they have a proven track record of success, and are also highly liquid (that is, any investor can exchange his shares for cash whenever he wants) because they are frequently traded in the market by both individuals and institutional investors.

Beyond regular dividend payments, investors in blue chip stocks are also generally have their portfolios protected against inflation. In periods of economic slowdowns, investors are known to opt for blue chip stocks to protect their investments and to recover lost earnings. However, this doesn’t mean the stocks are not subject to volatility themselves. The 2008 financial crisis that spurred the fall of Lehman Brothers is testament to that.

How To Spot Them

They are usually the biggest companies

Think of big brand names and long-standing multinational companies. They have spent many years in the game and have now reached a point of steady growth and consistency.

They are expensive to buy

Of course, having spent that long in the game, their valuations are not little. Also, their prices are worth it when considering the stability they offer the investors.

They have large market capitalization

Following from their size, their values as shown by their market capitalization are huge. Their market capitalizations are usually in the range of billions of dollars/Naira.

They have a steady growth history

Their financials show that they have a history of sustained growth and great projections. While this does not make them infallible, there is a certain degree of safety to them.

Dividend payment

Finally, they are known to pay dividends steadily. There might be a few exceptions, but they generally are pro-dividend payments especially because they no longer grow at the same fast pace more speculative investments grow at.

Blue Chip investments are certainly great pieces to add to a balanced portfolio.

Written by Lawretta Egba.