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Jan 06

The pros and cons of investing in blue-chip stocks

Reading Time: 4 mins

Blue-chip investing refers to buying shares in mammoth, established organisations with proven business models.

Blue-chip investments are generally considered low risk, and have a reputation for delivering reliable returns. This is probably one of the reasons why legendary investor Warren Buffet enjoys stocking up on blue-chips.

However, buying shares in large companies isn’t for everyone. In this article, we’re going to take a closer look at the pros and cons of investing in blue-chip companies. Keep on reading for all the details or click on a link to head straight to a section…

What are blue-chip stocks?

There’s no set definition of what officially qualifies as a ‘blue-chip’ stock. However, organisations might be considered ‘blue-chips’ if they have a huge market capitalisation, an established reputation, and a strong history of growth.

Many firms that are constituents of major share indexes, such as the FTSE 100 and S&P 500, would be considered ‘blue-chip’ stocks. Here are some examples:

  • Amazon
  • Apple
  • Bp
  • Coca-Cola
  • Microsoft
  • McDonalds
  • Rio Tinto
  • Shell

Because blue-chips have a reputation for delivering steady, reliable returns and for being relatively safe, many investors – including Warren Buffet – buy blue-chips with the intention of holding them for a very long time. And yes, we really mean a ‘very long time.’ Mr Buffet has been known to hold onto some of his blue-chip stocks for decades!

Were does ‘blue chip’ come from?

The term ‘blue chip’ originates from poker.

Back in 1923, Dow Jones employee, Oliver Gingold, described high value stocks as ‘blue chip’ stocks. That’s because blue poker chips had a higher value than red and white chips.

An interesting, 100-year old fact, and one for your next pub quiz!

What are the pros of investing in blue-chips

There’s no doubt that buying shares in well-established companies has its advantages. Here are three benefits of investing in blue-chip companies.

1. They’re less volatile than small-cap stocks

Blue-chips are firms that have already made a (big) name for themselves. Because of this, blue chip firms will rarely stun investors with a new product, service, and/or strategy as they’re already ‘grown up.’

As a result, the future performance of blue-chips is often easier to predict than smaller-cap companies, which is why the share price of blue-chips typically have low volatility. This is also why blue chips might perform better than small-cap stocks when the stock market is experiencing a turbulent period.

2. They’re often reliable performers

Blue-chips can be extremely reliable in the way that many of the world’s largest organisations are expected to post massive profits, year after year. These profits can often be in the billions!

Because of this, blue-chip shares often deliver steady, reliable returns – especially when held over the long-term.

3. Many pay DIVIDENDS

Many blue chip companies reward investors with dividend payments. This is another advantage of holding large-cap shares, which ties into the fact that blue-chips are often a safe bet when it comes to meeting investor expectations.

What are the cons?

Now we’ve covered the pros of investing in blue-chips, it’s worth knowing that there are also drawbacks to be aware of. Here’s are three cons of investing in big-name companies.

1. returns can be on the low side

While blue chips typically deliver reliable returns, this shouldn’t be confused with high returns. When it comes to investing, reliability comes at a price. So, if you invest in blue-chips, don’t expect huge, mouth-watering returns.

2. they’re usually expensive

If you want to add a big-name, established company to your portfolio it’ll cost you. Blue-chips are in high demand and are therefore expensive to buy compared to smaller companies. No biggie, but something to bear in mind.

3. they aren’t risk-free

Yes, blue-chips are less volatile, and have a lower risk of falling into liquidation compared to firms that haven’t fully established themselves.

However, if you buy blue-chips, don’t fall into the trap of getting complacent. ‘Low’ risk doesn’t mean ‘no’ risk, and blue-chips can – and sometimes do – get into big trouble.

No company is ‘too big to fail,’ just ask the former executives of Enron and Lehman Brothers!

how can you buy blue-chip stocks?

While legendary investor Warren Investor is a fan of blue-chip investing, you don’t have to be a billionaire yourself to gain exposure to global giants.

Investing in blue-chips is as easy and straightforward as buying other types of shares.

First, you need to decide on an investing platform. Once you’ve done this, you can then buy shares in the company of your choosing. To guide you through these steps, take a look at our comprehensive article that explains how to buy shares.

blue-chip exchange-traded funds

If you don’t want to buy individual shares, or you want to have exposure to lots of blue-chip firms – perhaps in order to diversify your portfolio – then you may wish to consider buying an exchange-traded fund (ETF).

There are a number of ETFs available that track blue-chips in one way or another. Here are some examples:

  • iShares Global 100 ETF (tracks 100 global stocks)
  • SPDR S&P 500 ETF (tracks the S&P 500)
  • iShares Core High Dividend ETF (tracks high dividend yield firms)
  • iShares Core FTSE 100 (tracks the FTSE 10)

Are you keen to learn more about investing? Why not sign up to our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. ISA tax treatment may change in future.

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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