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Stocks are among the most popular asset choices among investors and traders, not least because of their proven track record. The US stock market, as measured by the S&P 500, has achieved an average annual return of 10.26% from 1957 to 2023 [1].
They are also widely available. Any company that qualifies to be listed on a stock exchange also has the right to issue stocks, which represent ownership shares, and can be traded by basically anyone that has the financial means to do so.
But just because stocks are commonly available, it doesn’t mean they are all made equal. In fact, stocks are classified into many categories according to certain characteristics, such as the size of the underlying company, or where in the business life cycle it is.
Among the most desired category of stocks are what’s known as “blue chip stocks”. What exactly qualifies a stock to be a blue chip, and are they automatically the right pick for all investors?
Key Points
- Blue chip stocks are considered high-value due to their stable performance and resilience, making them attractive for risk-averse investors.
- Trading blue chip stocks can offer stability, consistent dividend income, and the potential for steady long-term capital appreciation.
- Risks include higher costs, limited high-growth potential, and susceptibility to economic volatility, requiring careful investment planning.
What is a blue chip stock? [2]
The term “blue chip” originates from the poker table, where blue-coloured chips are traditionally used to denote the highest dollar value.
Similarly, “blue chip stocks” is a label that describes stocks that are considered to be of top value. Since the value of stocks depends on the performance of the issuing companies, blue chip stocks have come to be synonymous with good quality stocks that have withstood the test of time.
Generally, blue chip stocks:
- Are nationally or internationally recognised
- Are well-established brands known for high-quality products and services
- Have consistently demonstrated profitability and stability
- Are financially sound and have weathered many economic downturns or cycles
- Continue to dominate in the face of repeated challenges and intense competition
Why trade blue chip stocks?
As blue chip stocks represent proven performers in their sectors, investors often trade them as a way to gain exposure to “cream of the crop” companies.
In essence, blue chip stocks are highly resilient, backed by a long and successful company history. They thus make for “safe” bets in a trader’s portfolio, and are capable of bringing stability as foundational stocks in a portfolio.
Because of their staying power, blue chip stocks can be a good starting point for risk-averse investors, as it is more unlikely for them to completely fail, compared to riskier plays such as penny stocks or micro-cap companies.
Another reason to trade blue chip stocks is their versatility – they can do well in long-term strategies, and are also capable of producing compelling returns over shorter tem periods when traded carefully and with advanced strategies.
Risks and benefits of trading blue chip stocks
| Benefits | Risks |
| Offers stability and reliability | Tends to be more costly than other stocks |
| If dividend-paying, offers consistent dividend income | Not immune to adverse market conditions |
| Can be found across different sectors | Lower capital growth potential compared to growth stocks |
| Enjoys high demand | More vulnerable to geopolitical or cross-border risks |
Benefits
The main benefit of trading blue chip stocks is their stability and resilience, given their long-running track record. Thus, they make for good entry points during market downturns, as they are likely financially better positioned for recovery.
Some popular blue chip stocks also have a track record of steadily increasing dividend yields. Such stocks are capable of producing consistent passive income over a long period to meet the demands of those who invest for income.
Because blue chips stocks can be found across several industries and sectors, investing in a broad selection of them is a good way to diversify your portfolio.
Lastly, because blue chip stocks are highly popular and always in demand, you are unlikely to encounter failed trades due to a lack of liquidity.
Risks
Blue chip stocks aren’t without their risks. For one, such stocks are typically highly priced, which means investing in them is costly. Investors should be prepared to put up significant capital when trading blue chips.
For another, many blue chip stocks belong to maturing or matured companies, and as such, may have less potential to deliver high growth. Investors seeking high capital appreciation may find blue chip stocks outperformed by stocks with higher risks, such as growth stocks.
Lastly – and importantly – blue chip stocks are not completely immune to economic volatility and failure. Many blue chip insurance companies including American International Group Inc, XL Group plc and Genworth Financial Inc saw their prices nosedive during the 2008 Great Financial Crash on account of their exposure to the US housing market or the financial derivatives underpinning the collapse. [3]
Hence, while there is good reason to trade blue-chip stocks, success is not guaranteed and investors should always do their due diligence.
Blue chip stock example: Apple Inc (AAPL)
As the largest driver and beneficiary of the smartphone boom, Apple Inc is widely considered as one of the best blue chip stocks of our time. The stock’s performance speaks for itself, with an almost 300% rise in the past five years.
While there has been growing criticism of a lack of innovation in its flagship product, the iPhone, the company’s status as a blue chip stock is far from threatened [4]. The company’s latest earnings reports beat Wall Street estimates in several key metrics, including earnings-per-share, total revenue, iPad revenue, and importantly, revenue for iPhone – with the latter clearly demonstrating Apple’s dominant position [5].
The company’s future plans further cement confidence in AAPL’s continued blue-chip status. CEO Tim Cook is making a big push towards AI with iOS 18 slated for brand new AI capabilities and features, supported by AI-ready hardware in the latest iPhone 16 and iPhone 16 Pro.
Long-term trading strategies for blue chip stocks
As mentioned earlier, blue chip stocks with consistently high dividend yields can be used to build up passive income that grows over time. Reinvesting your dividends in the initial period is recommended to cushion market shocks and help your income stream grow faster.
Also, while blue chips may not deliver explosive capital appreciation, they are nonetheless still capable of solid results over time. This can be seen from our discussion on AAPL above.
Furthermore, blue chip companies that are at the forefront of developing trends – such as Nvidia and AI – have arguably a better chance of riding the next revolution to the top, given their strong foundation and deep experience.
Trade popular blue chip stocks with Vantage
Thinking about trading blue chip stocks to diversify your current portfolio? Vantage offers access to the most popular blue chip companies from around the world. Take your pick from individual stocks, ETFs or index funds to balance your exposure in accordance with your analyses.
With Vantage Contracts-for-Difference (CFDs), gain access to the price action of leading blue chip stocks without direct ownership of underlying shares. Trade in all market conditions with the ability to take short and long positions. Best of all, enjoy low commissions, transparent fees and world-class support that only an award-winning brokerage like Vantage can provide. Sign up for a live account now.
References
- “S&P 500 Average Return and Historical Performance – Investopedia” https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp Accessed 15 Oct 2024
- “Blue Chip Meaning and Examples – Investopedia” https://www.investopedia.com/terms/b/bluechip.asp Accessed 15 Oct 2024
- “The Best And Worst Stocks Of The 2008 Crash: What We Learned – Yahoo! Finance” https://finance.yahoo.com/news/best-worst-stocks-2008-crash-205844396.html Accessed 15 Oct 2024
- “Apple’s Lack of iPhone Innovation Is Becoming a Big Problem – The Motley Fool” https://www.fool.com/investing/2024/04/02/apples-lack-of-iphone-innovation-is-becoming-a-big/ Accessed 15 Oct 2024
- “Apple sales rise 5%, topping estimates as iPad and Services revenues jump – CNBC” https://www.cnbc.com/2024/08/01/apple-aapl-earnings-report-q3-2024.html Accessed 15 Oct 2024
