If you’re a first-time investor and who has dipped your toes into the world of shares, you’ve probably heard about “blue chip” investments. This mysterious-sounding term may have you wondering: "What is a blue chip?" and "What exactly does it mean?”

Look no further. In this article, we'll break down what blue chips are in simple terms. That way, you can decide if they would be the right addition to your investment portfolio. Let's dive in!

Many first-time investors are intimidated by the stock market and may not know where to start. They may be wary of investing in shares that they perceive as risky or unstable. This can lead to hesitation when it comes to investing in the stock market at all.

But, missing out on the stock market means potentially missing out on long term financial gains. So, what can first-time investors do to make sure they are investing wisely? Depending on your needs, one option is to invest in blue chip stocks. But what is a blue chip exactly, and why could it be a good choice for first-time investors?

What is a blue chip?

A blue chip is a term used to describe a share of a company that is considered to be stable and financially sound.

When people talk about "blue chip stocks," they're usually talking about shares of big, successful companies that have been around for a long time. These companies have a history of making a steady profit and giving some of that money back to their shareholders through dividends.

Because of this, blue chip stocks are considered to be pretty safe investments. Many in the investing community consider them to be reliable, with a good track record of financial stability.

Some examples of blue chip stocks in Australia are Telstra Group Limited, ANZ Group Holdings, Rio Tinto, and National Australia Bank. Since these companies have a history of doing well, they're popular with investors. They're also considered as leaders in their industries, operating in key blue chip areas such as healthcare, finance, and technology.

A blue chip definition - according to Oliver Gingold and the Dow Jones Industrial Average

You may be wondering how a poker game became related to the investment world. Well, it’s all thanks to Oliver Gingold, from whom the term “blue chip” originated. To convey how important he perceived these kinds of companies to be, Gingold compared them to the high-value chips in a poker game.

Similarly, "blue chip" is used to describe artists who are the best of the best in the art world. These are artists who have been successful for a long time and have had major exhibitions. None other than top museums and galleries collect their art.

As a writer for the Dow Jones Industrial Average, Gingold definitely knew more than a thing or two about these companies. The Dow Jones Industrial Average (DJIA) is a group of 30 big companies that are traded in the stock market in the United States. Generally, these 30 biggest companies play a major role in why people choose to invest in US shares , as they are considered to be among the popular shares in the country.

These companies are some of the most reliable and financially stable businesses in the US. They come from different fields like technology, finance, and retail.

The purpose of the DJIA is to give investors a snapshot of how the stock market is performing as a whole. It's a way to track the performance of these 30 blue chip companies and see how their stock prices are moving up or down.

If you want to keep track of how your investments are doing, you can use the Dow Jones Industrial Average (DJIA) as a guide. But, it's important to know that the DJIA is not the only index out there. You may also refer to other indexes to measure your own investments.

What gives companies blue chip status?

We have the Dow Jones Industrial Average to help us track blue chip companies. But what are the parameters companies must achieve to attain this status? Let us share a few ways to help you recognise companies with such status.

1. High market capitalisation . Blue chip companies have a market capitalisation reaching billions of dollars. The "market capitalisation" of a company refers to how much the company is worth. We figure this out by multiplying how many shares of the company are available by how much each share costs.

Usually, blue chip companies have a high market capitalisation, which means they're worth a lot of money.

2.High dividend yield . Blue chip companies also tend to have a high dividend yield. This means that they pay out a part of their profits to shareholders in the form of dividends. This can make them attractive to investors who are looking for a steady source of income.

3.Record of stability and success . A blue chip company is likely a stable and successful business. This is often because they have a well-known brand and a loyal customer base.

Blue chip companies also tend to offer a variety of products or services. In return, this can help them weather any ups and downs in the market.

If you're looking for a safer investment option, you might want to look into blue chip companies. They may not give you big profits in a short amount of time like smaller companies. But they are more stable and have a lower risk of losing money. They can also give you steady growth over a longer period of time. Keep in mind, though, that all investments carry risk, and blue chip companies are no exception.

Examples of companies with blue chip status

Coca-Cola — taste the feeling

Coca-Cola is a key player in the beverage industry with a wide range of popular brands, such as Coca-Cola, Sprite, and Fanta. It's also one of the most well-known and respected companies in the world, with a history dating back to 1886.

Here are several reasons why Coca-Cola is a blue chip company:

1.Long-standing reputation . Coca-Cola is one of the world's largest beverage companies and has been in business for over a century. It has a well-established brand and a reputation for providing quality products.

2.Consistent earnings . Coca-Cola is a blue chip company because of its consistent earnings in the past. This has made it a good pick for investors who want a stable and reliable investment option. Investors look for companies that have a history of financial stability, which suggests they are likely to do well in the future.

3.Dividend payments . Coca-Cola is known for paying consistent dividends to its shareholders. This is another key factor that makes it a blue chip company. Investors tend to look for companies that pay dividends on a regular basis as it can provide a steady source of income.

4.Market capitalisation . Coca-Cola has a high market capitalisation, which is the total value of all the company's shares. A high market capitalisation indicates that the company is large and has a high demand for its shares.

Johnson & Johnson — take-care-of-you-whole-life company

Johnson & Johnson is a blue chip company that has been around for over 130 years. They are a health care giant, providing a wide range of products and services to people all over the world. You may have used some of their products, such as Band-Aids, Tylenol, and Neutrogena.

So why is Johnson & Johnson considered a blue chip company?

1.Company longevity . As mentioned above, J&J s a well-established and long-lasting company. This longevity has helped establish J&J as a leader in the healthcare industry.

2.Consistent financial performance . J&J has displayed consistent financial performance. Research shows that its market capitalisation is one of the highest among healthcare companies. Because of this, people who invest in it have been getting dividends for over 50 years.

3.Diverse business model . J&J is a company that makes products in three different areas: medicine, medical devices, and consumer health. Having this variety of products can be helpful for investors because if there are problems in one area, the other areas can help make up for it.

4.Leader in innovation . J&J is a leader in innovation. Their strong research and development program led to the creation of many innovative products. This keeps the company ahead of its competitors and allows it to maintain its position as a market leader.

Benefits of investing in blue chips

We've already highlighted about some of the perceived strengths of blue chip companies. But here are some more advantages to consider:

1.Stability . Blue chip companies are often well-established. They also have a proven track record of financial stability, making them a reliable investment choice. These companies have weathered economic downturns and market fluctuations. And because of this, they're more likely to keep doing well in the future. This can provide reassurance to investors.

2.Dividend yield . Blue chip stocks often pay dividends to their shareholders from the profits they make. These dividends can provide a reliable income stream for investors, such as those who are looking to add to their retirement savings. Because of this, dividends serve as one of the strong motivational tools for long term investors.

3.Potential for growth . Although blue chip companies are more stable, they can still experience growth and expansion. These companies can still grow and become more valuable over time, even if they're already successful. This is because they're often the best in their industry and have a proven track record of doing well.

4.High demand . Blue chip stocks are very popular because they have a good reputation and a history of financial success. Big investors like pension funds or insurance companies often want to buy them, which can make the stock price go up.

5.Diversification . Blue chip companies are leaders in key industries, such as healthcare, technology, and finance. By investing in them, you can spread your money across different sectors. This can help you lower the chances of losing all your money if one industry struggles.

Blue chip stocks can be one of the many greats way you can start building a diversified portfolio with dependable companies. To ensure you make the best choices, do your research and choose companies that match your investment objectives and level of risk.

Drawbacks and limitations of investing in blue chips

We know by now that blue chip stocks are generally considered to be a safe and reliable investment. However, there are still some potential downsides to consider. Let's talk about them.

1.Limited growth potential . Blue chips are already well-established and large companies. Because of this, you might not get as much growth as you would from smaller, younger companies. This could mean that you might not make as much money as you would with riskier investments.

2.Reliance on past performance . In the investing world, a company's past success doesn't always guarantee future success. It's crucial to think about factors like new leadership, industry changes, and competition when deciding whether to invest in a blue chip stock.

3.Lower dividend yields . In general, blue chip stocks may pay out dividends. But, the amount of money you can earn from them might be less than what you could make from other investments that carry more risk, like high-yield bonds.

4.Market volatility . Changes in the market or fluctuations in the economy affect blue chip stocks. This means that there is always some level of risk involved in investing in these types of shares.

5.Limited exposure to other areas . If you only invest in blue chip stocks, you might miss out on other types of investments like smaller companies or international markets. It's a good idea to spread your investments across different areas to manage risk and improve your chances of earning higher returns.

Even though blue chip stocks can be a good starting point for new investors, it's important to consider the potential limitations and drawbacks when making investment decisions. Knowing the risks can help you create a well-rounded portfolio that aligns with your investment goals.

A few of many ways to invest in blue chips

We've already covered what a blue chip is, including its advantages and drawbacks. Now, let’s explore a few ways you can invest in blue chips.

1.Blue chip funds . These are mutual funds or exchange-traded funds (ETFs) that invest in blue chip stocks. Blue chip funds are special because they choose to invest in strong, established companies with a good track record of making money.

Compared to other funds, they are often seen as less risky, but they might not make as much money as riskier funds. One popular blue chip fund is the SPDR Dow Jones Industrial Average ETF.

Before investing in blue chip funds, it is important to note the differences between mutual funds and ETFs to better manage your investment portfolio.

2.Blue chip cryptocurrencies . Blue chip crypto refers to the most widely used cryptocurrencies, such as Bitcoin and Ethereum. Research shows they are also another popular investment choice, besides blue chip stocks. However, take note that they have some key differences.

Blue chip stocks are linked to physical assets and products, but the crypto is not. Also, blue chip stocks usually have a steady and predictable growth rate. But blue chip crypto can be unstable as it can suddenly go up or down in price.

Moreover, the blue chip stocks are regulated by the government and considered safer. By contrast, blue chip crypto is not, which can make them very risky. From a philosophical standpoint, we're not big on crypto here at Pearler. If you're looking for more info on blue chip crypto, other sources will be better placed to inform you.

3.Shares from blue chip companies . Another way to invest in blue chips is by buying shares of a company. Think of it as owning a tiny piece of that company.

The Australian Securities Exchange (ASX) is like a marketplace where you can buy these shares. When you invest in blue chips through ASX, you become a shareholder of those companies. This means you have the potential to earn money from their profits and growth.

Bonus: Penny or speculative stocks are the opposite of blue chip stocks. These are shares of companies that are small, risky, and often traded at very low prices.

Penny stocks are not traded on big stock markets and are usually risky investments. While blue chip stocks can be a steady and reliable investments, the unpredictability of penny stocks may lead to significant losses for investors.

Is investing in blue chips for me?

As a first-time investor, it can be a good idea to learn what a blue chip is in investing. This can be one of the many ways for you to balance out riskier investments and potentially earn steady returns over the long term. As with any investment, it's essential to diversify your portfolio and not put all your eggs in one basket.

Before investing in blue chip stocks, it's worthwhile to do your research and understand the possible risks and benefits. Consider your own financial goals and investment timeline. It's also crucial to know how much risk you're comfortable with before investing in any shares, including blue chips.

Happy investing!