You might have heard that stocks of Jollibee and SM are blue chip stocks from your investor friends. But, what exactly are blue chips?
In a nutshell, a blue chip stock is a stock issued by a large, well-established, and financially sound company with a long history of profitability. These companies are typically market leaders. They are known for their strong track records, stable growth, and reliable dividends.
What can be considered a blue chip?
Blue chip stocks are regarded as the highest-quality stocks in the stock market. They are often used to benchmark a country’s growth and even other stocks in the same industry.
Typically, blue chips have the following characteristics:
- Big market capitalizations
- History of strong profitability
- A Solid track record of dividends
- Has a stable financial condition
For the Philippines, the stocks that compose the $PSEi are usually considered the Philippine blue chips. Thirty (30) stocks are selected by the PSE, with public float and liquidity being the main criteria. They also make sure to select a market leader from every industry. This way, the index can accurately reflect the economic condition of the country.
What are the implications of investing in blue chips?
Since blue chips are seen as the safest stocks, this means that the reward you can get is usually low. Blue chips are considered “predictable businesses,” so the times that you can buy them for cheap are rare. On the other hand, mid to small caps like $PIZZA and $SSI have a lot more uncertainty. Thus, the reward is also typically higher since the market isn’t sure how to value them.
Aside from this, blue chips also experience less volatility. Buyers and sellers seldom rush to buy or sell them since not a lot of uncertainty surrounds these stocks. Sans black swan events, Blue chips usually weeks to months to make a move.
When is the best time to buy blue chips?
Since blue chip stocks typically have solid track records, you’ll rarely get a chance to buy them at discounts. However, prices due crash because of systematic risks, that’s usually the best chance you’ll have to get shares at solid prices.
Take for example the COVID pandemic. While it did have a big effect on companies during the lockdown, it didn’t necessarily mean that businesses won’t be able to bounce back and grow again afterward. As restrictions eased, a lot of stocks in the Philippines already started showing solid growth. Many even released dividends, which due to the crash in prices, caused yields to be very high.
The rule of thumb to remember is that if a blue chip crashes, figure out if it’s due to the business or not. If it isn’t, you have yourself an opportunity you shouldn’t miss out on. This will let you invest in quality stocks that pay good dividends.
Also, if you want to find a list of blue chips or figure out what stocks give the biggest dividends, you can find the information you need all on the Investagrams homepage!
