What is Blue Chip Stock?
The name ‘blue chip’ is derived from the blue chips in casinos (blue chips being of peak value). Blue chip stock is the stock of a nationally well-established reputable company. Reasons that get them this nickname are their stable earnings, no widespread liabilities, little to no debt and decent dividend returns. They are also usually large companies such as Coca-Cola or Wal-mart with products or services in high demand. Due to the first-rate credit ratings and low/little debt levels blue chip stock companies are also able to borrow money at a lower rate than other competing companies.
Continuing with the blue chip stock company Coca-Cola – it is the fact they have exceptional market place standing that creates higher sales. People are more likely to disregard the price when buying goods and services of brands they know and are familiar with because they know what they are getting. I myself, when purchasing a train ticket found I was drawn more towards Virgin Media tickets than the other train lines offered because the name is so well known you feel as if nothing will go wrong, they have a reputation to uphold.
There are four ways to invest in blue chip stock. Number one, Blue Chip Baskets: this type of investment is like getting birthday presents for the in-laws – you paid for them but you didn’t have to go chose them. You invest let’s say £50 in a basket and inside this basket is multiple stocks, for instance Coca-Cola, Wal-mart, Apple and so on. Although you don’t pick the companies, you now own fractions of multiple blue chip stocks.
Number two, Diamond: if you chose to buy a share of Diamond you are investing in a fraction of The Dow Jones Industrial Average which has an index of thirty blue chip stocks (all traded in the US).
Number three, SPDRs (Standard and Poor’s Depositary Receipt (spiders)): (traded on the American Stock Exchange (AMEX) under the ticker symbol SPY) each share of the SPDR contains 1/10th of the Standard and Poor’s index (S&P 500) and roughly trades 1/10th of the dollar value of S&P 500. SPDRs provide regular dividend payments (once every quarter).
Finally, number four, HOLDRs (Holding Company Depositary Receipts): (traded on the AMEX) HOLDRs wipe out individual brokerage commission fees on buying shares in multiple companies by allowing you to invest in a sector (similar to the ‘blblueue chip stock basket’). There are 17 types of HOLDRs you can invest in from Oil Services to Wireless. The way it works is you must buy ‘lots’ in units of 100 or more, for example if the BBH (Biotech HOLDRs) was standing at $70.27 you would have to purchase $7,027 worth ($70.27 x 100 units). In buying one ‘lot’ of BBH HOLDRs you would then own 24 shares of QJAGEN NV, 15 shares of Amylin Pharmaceuticals, 11 shares in BioMarin Pharmaceuticals and so on (securities shown are from December 2011).
With this type of investment you are still entitled to shareholder perks, dividends and annual reports.
Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.