Blue chip stocks
Anyone who has ever traded has come across the term ‘blue chips’ at some point. The term is used to describe shares . Also called blue chip shares .
However, most people have absolutely no idea what the term means at that moment. That is why everything you need to know about blue chips is explained below. There are also a number of examples and you can read how you can trade blue chips.
The definition of blue chip stocks
The first question you want to have answered is what the blue chips are. Unfortunately, there is no clear definition, but in general a blue chip is a share, a share of a large, profitable and established brand or company. These companies have been around for a very long time, are very well known and are often market leaders in their sector. These companies often produce very well-known products or manage well-known brands. Finally, in most cases the companies are active all over the world, they act globally and are therefore multinationals.
In short, blue chips are not a special type of stock, but say more about the company itself. The value of the shares is usually very stable and grows rather than shrinks. They also often offer very good and interesting dividend yields, which certainly explains their popularity. In contrast to speculative shares, blue chips are not volatile and are profitable.
You will find most blue chip stocks in the most well-known indices such as the S&P500, the Dow 30 and the FTSE 100. There is no clear rule for being a blue chip stock. Opinions differ on this and companies change of course. However, usually the blue chips are the companies that are at the head of their sector. This is why you also understand the name, because blue chips are the chips that are worth the most in poker. The term was introduced in the ‘roaring twenties’ in New York in the previous century to indicate which shares were the most successful and reliable, in short, which were worth the most.
Which stocks are blue chips: the examples
To illustrate the theory, a number of examples of blue chip shares are discussed here. As mentioned, there is no official list of blue chips because there is no clear definition. However, there is a way to see which shares belong to the category because the major indices often have blue chip components. Think of the Dow Jones, CAC 40, Euro Stoxx 50 and DAX. The FTSE 100 and the S&P 500 have both blue chip shares and shares of a smaller status. Below we name a number of examples of so-called blue chip shares. You can always discuss this, but these are a number of widely accepted blue chip shares:
- IBM
- Johnson & Johnson
- Coca Cola
- Apple
- Pfizer Disney
- Microsoft
- Starbucks
- Nike
- Verizon
- Heineken
- Wal-Mart
Why Trade These Stocks? The Pros and Cons
There are a number of reasons to trade or not to trade in blue chip stocks. In order to make a good decision, you need to weigh the pros and cons. Some pros and cons are listed below.
Advantages
When you trade blue chip stocks, you are almost certain that you will make money. The question is how much, but these stocks are so strong and stable that they almost never fall. Investors have a lot of confidence in these companies because they are experienced and simply very large.
Disadvantages
People who invest in blue chip stocks often trade privately and dare to invest fairly large amounts in the companies. However, these companies are also certainly affected by a crash, for example. Since this leads to panic on the stock exchange, people quickly sell their shares and the blue chip shares can fall faster than other shares.
Also, large companies can lose their blue chip status due to major changes in the sector. If large oil companies do not adapt in the coming years, they will no longer have a right to exist in the future. Investors who trade in blue chips should pay attention to these kinds of things.
Conclusion
Investors who invest in blue chips like their portfolio to grow slowly but surely. They look at the long term and do not trade based on the day. However, it is important to keep a close eye on the news and see major changes in the market in time. If this is something for you, read below how to trade in blue chips.
Trading in blue chips
There are several ways you can trade in blue chip shares. You can of course just buy shares, but you can also trade in CFDs, (binary) options and futures. We will go through them below.
Buy and then own it for a long time
Normally investors buy blue chips to keep them in their portfolio for a long time . Over this period of time you earn quite a lot of money with this investment. Among others, Warren Buffet has become very rich with this. However, there are of course also disadvantages to this approach as discussed above.
Active trading
You can also trade more actively in blue chips. You do not buy the blue chip share where you expect to make a nice profit in a few years, but the share where you now know that the price is very low and where you expect the share to rise in the near future. Usually these shares are not very volatile so there must be a reason for the low prices. When you see these causes coming and have confidence in the growth of the prices after the dip, then you should buy this share quickly. You will not earn as much with this form of trading as with the more volatile shares, but you certainly run less risk . This does require a great understanding of the market, because otherwise you will have difficulty estimating the situations.
Futures (future contracts)
Futures are derivative contracts that are traded on the stock exchange and with which investors trade in long and short positions. They can be traded on anything such as commodities, shares, bonds, but also on blue chip shares. Traders who actively trade in blue chips can increase their position via futures without having to invest much extra. This increases the chance of profit, but of course the risk also increases. If you have a good understanding of the market and are aware of the risks you run, then this is a very good way to earn extra money compared to trading the shares themselves.
However, besides the fact that the risk increases, the size of these contracts is usually very large for private investors. You also need a special broker for this, so you really have to want it to make it worth the time.
Trading with CFDs (Contract For Difference)
Another option is a CFD . This is another type of derivative and is not traded on the stock exchange. CFDs can be bought and sold directly to and from banks and brokers. They are otherwise pretty much the same as futures. Fortunately, they are smaller in size and therefore more attractive to smaller entrepreneurs.
This makes them suitable for the private investor. You trade with long and short positions and are therefore very active in your trading with blue chips. Therefore, it does require a bit more of your time than if you trade in blue chip shares in the traditional way.
ETF’s (Exchange Traded Funds)
These are packages of shares that are traded on the stock exchange. When you trade in ETFs , you are actually trading in a large package of blue chip shares, provided you are on the right index such as the FTSE 100 or the S&P500. Because the package contains many shares, it is less volatile and because blue chips are already less volatile, you have very stable packages of shares.
Binary options
The last example we will discuss here are binary options. These are also derivatives with only a small amount of risk if you buy the option. It is literally a bet on whether X will happen or not. The option either yields a lot of profit or becomes worthless. In addition, the options can be bought on various markets. If you are good at estimating the course of the price, then this is definitely something for you. Of course, be careful not to increase the small risk you run too much.
Start investing
Now you know a lot more about what blue chips are and what you can do with them. It is wise to start with blue chips and take the long-term strategy when you want to invest in them. When you understand these shares well, you can try out the riskier strategies.
Are you excited about trading blue chip stocks after reading this article? Compare brokers and choose the broker that suits you best!
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