Derek, what are blue chip stocks?
Every industry is full of jargon and the investment community is no different.
In fact, when I’m talking with clients I constantly remind myself to avoid words that I find common but can be interpreted in various ways to those who aren’t in the profession. That said, jargon often has fascinating origins, and the term blue chip is one of those interesting definitions.
While I am a strong believer that the stock market is not a casino, the usage of “blue chip” comes from the chips used in the familiar card game of poker. Chips are used for betting in poker and have various colours which help define the value of the chips.
In a classic set there are white, red and blue chips. The blue chips typically have the highest value.
Card games aside and moving back from Vegas to Wall Street, how does this relate back to stocks? The idea of calling a stock a blue chip helps define that the company is considered one of the current leaders in their given industry or sector.
Expanding on this, blue chip companies have proven that they can stand the test of time and can survive recessions and profit in rising economies. Blue chip names are certainly familiar to most of us. Some notable examples include General Electric, Home Depot, American Express and Coca-Cola.
While you may not be a frequent user of these products, they are no doubt familiar companies and you know what business they are in. These companies have values in the billions of dollars and tend to have operations around the globe.
In Canada, our blue chip names include our big six banks, biggest energy names, as well as our phone companies (among many others).
So now that we know what blue chip companies are, it’s valuable to consider whether they need to be a part of your investment plan. The concept when considering blue chip stocks is that you’re investing your money in a company which, despite market conditions, will likely grow over the long term. They may not be the fastest grower in their given sector, but they should be consistent.
For some investors, the point in investing in these companies is more about consistency than explosive growth. Other investors choose to focus more on companies that could develop into blue chip stocks someday. There isn’t a right answer, but it’s important to consider what your strategy is.
If you’re wondering how the big blue chip stocks are faring in any given day, you’ll want to check the performance of the Dow Jones Industrial Average (DJIA) or just the “Dow.”
The Dow represents the movements of the 30 leading blue chip stocks which trade in the United States. The companies in this group are from a number of different sectors, such as technology (Microsoft), consumer discretionary (Disney) and energy (Exxon Mobil).
Just because a company is considered a blue chip stock today doesn’t mean it will always be. For example, the Dow has been around since the late 1800s, while most of the companies have only been included in this index for less than 30 years.
In short, blue chip companies may be leaders today but obsolete years from now, while others may remain leaders for decades to come. One such example is the US Leather Company, which is a former Dow component that was dissolved in 1952 but at one time was one of the largest companies in the United States.
So, with this new knowledge in your hand, consider whether your portfolio could use some exposure to blue chip stocks. Chances are, if you’re a diversified investor, you are likely investing in these names already.
But remember, just like the game of poker, you don’t need to go all in with all your blue chips, and consider the cards in your hand before making any moves.
As always, consult with a professional before making any investment decisions.
Wealth Watch is written by Derek Fuchs, a wealth advisor with ScotiaMcLeod in Red Deer. It is provided for informational purposes only. Readers are urged to consult a wealth advisor for help with their personal investment circumstances. Fuchs can be contacted at firstname.lastname@example.org.