Pros and cons of trading blue-chip stocks
Pros of blue-chip stocks
Blue-chip stocks are typically viewed as low risk because they tend to post steady earnings and, more often than not, pay out dividends to investors. A blue-chip stock tends to be trusted by investors, partly because it will have a large market capitalisation. They are the opposite of penny stocks, which tend to have a lower, less stable price and do not pay dividends as regularly.
Cons of blue-chip stocks
Blue-chip stocks are not immune to crashes or bankruptcy, but such occurrences tend to make the headlines. As these stocks are primarily owned by the investing public, if there is some bad news in the market, it could cause substantial damage to the share price.
Blue-chip stocks are good for investors who want to see steady gains to their portfolio, but for speculators, they don’t tend to have the short-term movement needed for many trading strategies. Short-term traders are unlikely to see drastic day-to-day movements in the price of a blue-chip stock because of its relatively stable market capitalisation.
The term blue chip has its origins in casino gambling, and the tradition that blue chips tend to be the most valuable in a set. First used to mean highly priced stocks, its definition has changed over time to mean what it means today.
Identifying a blue-chip stock
The companies considered to be blue chip will tend to change over time. 19 of the 30 companies listed on the Dow Jones Industrial Average – the most well-known blue chip stock index – in 1987, for instance, no longer feature more than 30 years down the line.
There are some major companies that would once have been considered blue chip among those 19 – companies like Kodak, General Motors, and Sears.
While it can be easy to lose your blue-chip status, it’s often much harder to finally become recognised as such. For example, Apple were not featured on the Dow Jones until 2015: three years after it first became the world’s biggest company by market cap.
Why are they called blue chips?
The term blue chip has its origins in casino gambling, and the tradition that blue chips tend to be the most valuable in a set. First used to mean highly priced stocks, its definition has changed over time to mean what it means today.
Is blue chip the same as large cap?
A blue chip stock will typically have a large market capitalisation, but that doesn’t necessarily mean that all large-cap stocks are also blue chip. This is because a company can have a high valuation but lack the stability and prestige to be considered blue chip.
