What are blue chip shares?
Some of the typical characteristics of a blue chip company includes:
- Large company
- Good financial track record
- Older companies
- Pays dividends
If you're interested in investing in the stock market, you've probably come across the term 'blue chip' stocks. You may be wondering what they are and how you can invest in them.
The term is a little vague, but generally speaking blue chip stocks are major listed companies that have had a good financial track record spanning many years. These kinds of companies tend to be safer and less volatile than other stocks and often pay a dividend.
During a stock market crash, a recession or market volatility, you'll often hear analysts suggest blue chip stocks to buy. The reasoning here is that major companies are more likely to weather a storm and hence their impacted share prices are expected to rise again after the crisis ends.
Some of the typical characteristics of a blue chip company includes:
There's no official list of 'blue chip' stocks – the closest we have is the list of companies on the S&P/ASX 50 index, a list of Australia's top 50 companies by market capitalisation. It includes companies with a history of providing steady returns and minimal volatility to investors. These companies are spread across a range of market sectors, including:
Companies in Australia's financial sector make up a large portion of the top 50 stocks. These companies tend to have a history of providing large dividends and include AMP and the Big Four banks: CommBank, Westpac, ANZ and NAB.
As mining is a cyclical industry, resources companies have the potential to provide high capital growth, at the same time have a reputation for underperforming when the mining industry experiences a downturn. Having said that, companies such as BHP Billiton, Woodside Petroleum and Rio Tinto all feature in the S&P/ASX 50.
While blue chip stocks tend to be a safer investment, they don't usually rise considerably in value over a short-time frame unless you can scoop them up at a discount during a downturn. This means that blue chips are long-term investments or used to provide an ongoing incoming through dividends.
Those looking to make a quick buck by striking it lucky invest in riskier but smaller companies called 'small-caps'. When you invest in a small company you're betting that it will be the next big thing and turn that pocket money into millions.
It can be tempting to take a punt on speculative companies. These are companies that do not have a long, well-established history of providing stable returns to investors. They’re also typically located outside the list of the top 100 companies in Australia. These are sometimes called 'growth stocks' and the smallest are penny stocks – those that trade at less than $5 per share.
Penny stocks. Penny stocks tend to trade for less than $5 and are also called micro-cap stocks or small-cap stocks. The idea is to buy them for a low price with the promise of big profits later. They're generally riskier, speculative stocks.
There are two ways to earn money from shares. Not only can you benefit from capital growth in the value of shares over time, but you can also earn an income from dividends and any additional franking credits. Dividends are more often paid out by blue chip stocks, which is part of what makes them so attractive.
A dividend is a company’s way of distributing its profits to shareholders. Many companies listed on the ASX pay dividends twice a year, including a smaller “interim” dividend and a larger “final” dividend. However, not all companies pay dividends to shareholders, and will instead invest all of their profits back into the company.
Dividends tend to be paid by larger, well-established companies on the ASX and you can use them to provide a regular, ongoing source of income. This offers you security and stability for the future, while at the same time giving you a chance to benefit from the company’s long-term capital growth.
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