When you start investing, deciding which companies to buy stocks from is like choosing a dish in a very long menu in a foreign language. The easiest way to go is asking for the speciality or more popular dish.
The equivalent for shares would be blue chips. In finance, blue chips refer to the most valuable companies in the market. This name comes from poker, as blue is the colour of the gambling chips with the highest value. If you are a newbie investor, blue-chip stocks can be a good start point for your portfolio. Here’s why.
There is no formal list of blue chips, nor are the criteria clearly defined, but generally, they’re businesses with long-lasting stable growth and a market capitalization that’s usually higher than $10 billion. In case you don’t know, market capitalization is the worth of the total value of all the shares of a company (for large-caps or large capitalization companies, it’s usually several billion).
Blue chip companies are considered trustworthy because they have been in the exchange for decades and managed their money responsibly. Normally, they are not going to need a capital increase (or seasoned equity offering) to make large investments because they have already grown. Also, their products and services are usually well-known and have a good reputation, making them leaders in their industries.
The advantage of blue chips for you as an investor is they tend to keep their value over time. They are unlikely to go bankrupt and, in case of a crisis, tend to be more resistant and recover better. And more importantly, most blue chips pay dividends regularly.
These are long-term investments and generally require you to keep your money invested for 5 to 10 years to see profits. Keep also in mind that it is important to diversify your portfolio by getting stocks from different companies, including mid and small caps. Lastly: even if they are considered more resilient, a crisis can also affect blue chips. We saw some examples in the 2008 financial crisis, where even large established companies like Lehman Brothers went bankrupt.
Some commonly used examples for blue chips are Coca-Cola, Walt Disney or Johnson & Johnson in the United States, and L'Oreal, Siemens or Telefonica in Europe.
Besides blue chips, there are other companies with big market capitalization that we need to consider as well, even if they have only been in the exchange for a few decades. We refer to the biggest tech companies in the US, which have their own acronym: FAAMG (or GAFAM). These are Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google.
Originally, the term was “FANG” (Facebook, Amazon, Netflix, and Google). Apple was added a bit later and formed “FAANG”. At the time the acronym was coined, Microsoft was not performing at the same speed as the others, but since 2014 the situation changed drastically and now its value has quadruplicate. So it replaced Netflix, whose market capitalization is small compared to the other five.
To understand the importance of the Big Five, we have to get an idea of how big they are. The S&P 500 index tracks 500 companies from the main US exchanges, NYSE and NASDAQ. Despite the five FAAMG companies representing only 1%, they hold 13% of the value of the whole index and get more than a third of its returns.
So when the FAAMG stocks prices go up or down, an index like S&P 500 can move, and even the whole economy.
Blue chips and ETFs can follow the same trends and offer similar dividends for the same amount of money invested. So which one suits you best? Let’s go deeper into their differences.
Investing in an ETF that tracks an index means diversifying into a bunch of different companies, so it is generally safer and easier for trading beginners. Individual companies however may have more potential risks: either from the business itself or the industry it works in. ETFs are only affected by the systemic issues that influence the whole market. A company can go bankrupt, but that won’t immediately bankrupt the whole index.
On the other hand, if you have a diversified portfolio of blue chips, the potential losses with one company can be covered by the gains with another.
Many ETFs are composed of blue chips. For example, SPDR Euro Stoxx 50 ETF holds the 50 biggest eurozone, including Total SE, Allianz SE, L’Oreal SA, or Siemens AG.
The Invest pocket of your Vivid app offers you more than 1000 stocks, among them a large selection of blue chips, where you can start investing from €0.01.
It’s so not vital to know if a company is considered a blue chip or not. Rather, you should take the time to do a bit of research. How long has the company been around? How well are they doing? How generous are the dividends? When investing, as in any field of life, setting the right expectations can save you a lot of frustration –and, of course, money.
Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.