What are blue chip shares?

Named after what are traditionally the most expensive poker chips in a casino, blue chip stocks are generally thought of as some of the top options for investors to consider. So what gives a share “blue chip” status, and what can you expect from an investment in blue chip stocks? 

There isn’t an official registry of blue chip shares or an industry body that bestows the lofty title upon a company’s stock. What’s considered blue chip shares is generally based on the opinions of investors and stock brokers. 

Generally, share in a company may be considered blue chip stock if the company in question:

• Is large in size
• Has been operating for a long time
• Has a steady and consistent financial track record
• Pays dividends to shareholders

One simple way to find blue chip shares could be to check the S&P/ASX 50 index, which lists Australia's top 50 companies by market capitalisation. While you’ll still need to check your research before investing, these top-rated companies are more likely to satisfy the blue chip criteria.

What are the benefits of blue chip shares?

Blue chip shares are often considered to be relatively stable and secure compared to other stocks on the market. Shares in well-established companies are considered more likely to retain their value over the long term and weather economic volatility. This in turn means that blue chip shares are more likely to pay dividends on your investment, which could turn into a passive source of income for you.

What are the drawbacks of blue chip shares?

As some of the premium choices on the stock market, blue chip shares often have higher prices, which could increase the cost of your initial investment. This could also mean lower yields on your investments when you compare the cost of blue chip shares to the value of their dividends. Also, as these companies are already well-established, you’re less likely to see your investment experience significant capital growth overtime compared to some smaller or younger companies such as start-ups.

Should you invest in blue chip shares?

As is the case with most financial decisions, the best choice for you will depend on your household’s financial situation and your personal goals.

Investors looking for long-term security in their investments may find blue chip stocks valuable. With these shares more likely to retain their value for longer, adding blue chip stock to your portfolio could let you benefit from dividends over time.

However, blue chip companies may not be the best choice for speculative investors who are looking for shares whose value will rapidly shoot upwards, allowing them to make returns from capital growth in their investments.