Why do most investors consider blue chips as a safer investment?

 What is a blue-chip?

When we say blue chips, we refer to companies and corporations that can easily withstand economic falls because they sell high-quality products and materials. These companies mostly have sound financial health and are renowned. Most investors consider them better and safer investments due to the company’s proven reputation, stability, and success record.

Why did blue end up having a name as such?

In a game called Poker, the players make us of chips with different colors. A chip can either be color red, blue, or white. In this game, the blue chips would always have more value than the red and white ones. Hence, the name of the blue chips came from the game Poker.

In 1923, people used the term blue chip for the first time, and the rest was history. Oliver Gingold, who works at Dow Jones at a time, observed stocks that amount to or are greater than $200 per share. He was the one to call the expensive stocks blue chips. In today’s trading, when we say the term blue chip, we do not always mean that the stocks are expensive if we use the Poker game as an analogy and Oliver Gingold’s observations. When we say blue-chip, we suggest that the stocks come from companies with a good foundation and can withstand economic downturns.

More on the blue chips

As we have mentioned previously, blue-chip companies are the leaders of their specific industries since they have proven their brand’s worth for many years to make a good portfolio and survive any economic distress. Even though there is no exact criterion for determining a blue-chip, a blue-chip company should have a market capitalization of $5 billion. Furthermore, any company can still be a leader in the industry regardless of size.

How to determine a blue-chip company

Few examples of blue-chip companies are Coca-Cola, Pepsi Co., McDonald’s, and Walmart. Today, the world’s biggest retail company in terms of revenue and the world’s biggest retailer is Walmart Inc. What makes these companies qualified to be called blue-chip stocks? Listed below are some of their characteristics:

  • Good financial health. These companies have little to zero debts, huge market capital, and high equity returns.
  • Volatility. It is a fact that the market is unpredictable, but these companies’ investments usually do not tend to change significantly and rapidly compared to other companies. They have proven their status in the economy already.
  • Liquidity. Investors who trade with blue-chip stocks can quickly sell the investments they bought with the confidence that they will have a buyer on another end. Blue-chip companies’ stocks have investment-grade bond ratings, and they usually offer stable, if not rising, dividends.

These are the characteristics of blue-chip stocks that make investors think that they are safe investments. However, we cannot remove the fact that the market will always be unpredictable. There are also some cases wherein company giants faced distress and struggle even if they are good companies. Let us take General Motors as an example when they filed for bankruptcy in 2008 due to the global recession.