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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.
Blue chips are stocks that are well known, are high quality and are often market leaders in their industry.
As such bluechips offer lower-risk, are often less volatile and can be considered safe havens for investors.
Blue chips in Australia generally have four key characteristics:
Source: S&P/ASX20 index
Blue chips as we’ve gone through are larger more established investment options.
As such such they suit a particular investing style or thesis.
For those who want consistent returns a blue chip stock could be ideal for them. However, like everything in investing it is risk verse reward. As such investors might get smaller returns by investing in blue chips
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.
Retailers tend to offer medium-sized dividends to shareholders, and Woolworths, Coles and Wesfarmers are popular choices among investors.
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.
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.
Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
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