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What does it mean to be a blue chip?

If you’re thinking about getting into investing, you should first get an idea of the landscape and what options are available to you. You might want to start safe by investing in shares that don’t pose any major risks – and this is where it’s important to understand what ‘blue chip companies’ means.

On the other end, if you own a business and you’re looking for growth through investment, blue chip companies provide a benchmark to guide your strategies and business objectives.

What is a blue chip company?

A blue chip is a company that is recognised nationally for its positive reputation and high-quality product or service. Blue chips are successful businesses that can be trusted to perform well and operate profitably even under adverse market conditions.  They’re generally well-established, long-running companies that have proven their stability and steady growth over some time.

The term was first coined in the 1920s by Oliver Gingold, who worked for Dow Jones, and is a reference to poker chips—wherein blue chips hold the highest value. At the time, the term was used to describe stocks of particularly high value, but these days blue chip refers less to the price of the stock itself and more to the stature of the company. Having said that, you can certainly expect blue chip stocks to come with a hefty price tag. Blue chip companies tend to be free of debt, and most blue chip companies offer favourable dividends to their shareholders.

Examples of blue chip companies in the UK include HSBC, Unilever, Tesco, Vodafone and AstraZeneca. Globally, blue chip companies include The Coca-Cola Company, IBM, and Disney.  Risk-averse investors may look to blue chip stocks as they are, in theory, less volatile than non-blue chip investments. Because of their reputation and stature, stocks for blue chips are, of course, highly desirable. There will always be someone looking to buy into blue chip stocks, which means you’ll always be able to sell. This high liquidity makes blue chip stocks even more attractive.

What is a blue chip index?

A blue chip index is a share index that tracks the stock performance of blue chip companies. Tracking blue chip companies is a good way of gauging the viability of a particular industry or sector – as blue chip companies represent the strongest stocks in their respective industry. The FTSE 100 tracks the top 100 blue chips listed on the London Stock Exchange. 

Are blue chip companies always a safe investment?

No investment is 100% free of risk, even when investing in blue chip companies. While blue chip companies are generally expected to weather the toughest storms, they may still struggle to stay afloat if conditions become particularly volatile.

Nokia is an example of a company that was once a blue chip, but went downhill as Apple entered the mobile phone market. Deutsche Bank, among other European banks, didn’t manage to come out of the 2008 global recession unscathed, losing its blue chip status in the process. Unexpected changes in the market or economy are a challenge every company faces, but for the most part, blue chip companies are more likely to bounce back over the rest.

With that in mind, it’s best to not place all your eggs in the blue chip basket, especially because they’re far more costly; instead, make sure you’ve got a diverse trading portfolio. 

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