What are blue chips in the stock market?
As a rule, most beginning investors, one way or another, begin their activity on the stock market with shares, which are usually called blue chips.
What are blue chips? Which stocks are they, and what advantages and disadvantages do they have?
Blue chips on the stock market
Blue chips on the stock market are called shares of large companies that have the largest capitalization on the market and high reliability. Such companies are also called first-tier companies.
The term "blue chips" is borrowed by the stock market from the gambling industry - the most expensive chips in the casinos are blue.
Investments in blue chips have low risk and bring the investor a stable, though small income.
Characteristics of blue chips
All blue chip stocks have a set of certain characteristics:
- High liquidity
This is one of the key criteria by which a company's shares are referred to the first tier. All blue chips have high liquidity. This means that they are bought or sold almost immediately. Accordingly, the risk that the share price will change drastically during the deal execution is reduced to almost zero.
- Low spread
The small size of the spread is a consequence of high liquidity. Because there are so many buyers and sellers of blue chips, the buy and sell prices of a stock differ only slightly. While low liquidity stocks may have a spread of more than 10%, first-tier stocks tend to have a spread of less than 1%.
- Low level of volatility
The first tier includes companies that have been on the market for many years, are leaders in their industries, and are reliable and stable. Therefore, in a short period of time, the price of their shares changes smoothly and without sharp jumps. This gives the investor a certain guarantee against price collapse, but at the same time it leads to a low yield. For this reason blue chips are not at all suitable for aggressive exchange strategies.
It is worth noting that all blue chips have these characteristics, but not all stocks with these characteristics are blue chips.
Blue chips of the Russian market
On the Russian stock market, blue chips include stocks of companies, most of which belong to the oil and gas, energy and metallurgical industries. At the moment, Russian blue chips include shares of 15 companies:
On the basis of the shares of these 15 companies on the Moscow Stock Exchange is calculated MOEXBC blue chip index.
Chart of the MOEXBC blue chips index
How to buy shares of the first tier
Buying blue chips is technically no different from buying other stocks. To do so, it is necessary to conclude a contract with a licensed broker, install the appropriate trading terminal and buy the necessary shares.
You can even form an investment portfolio that replicates the MOEXBC index. This will not cost an astronomical sum - to buy one lot of all the shares of the first tier of 100 thousand rubles is more than enough.
Interestingly, the dynamics of the portfolio will be almost identical to the dynamics of the Mosbirch index.
Graph of indices for the last 5 years (blue for the MOEXBC index, orange for the Mosbirzh Index). Source: Moscow Exchange.
The explanation of this similarity is quite simple: the main part of the Moscow Exchange Index is exactly the blue chips. For example, only shares of Gazprom, Sberbank and Lukoil make up 43% of the Mosbirzh Index.
Features of blue chips
First-tier stocks have some features that an investor just needs to know about:
- The price of blue chips depends little on speculators and reacts more to the fundamental reasons and financial statements of the issuers.
- Even for a large block of shares in the first tier there will always be a buyer or seller. The price will be quite favorable and the commission will be minimal.
- Blue chips have a large margin of safety. In the event of some kind of crisis, the price of low-liquid stocks could collapse, while the drawdown of first-tier stocks would not be as deep.
- Since the issuers of blue chips are the largest companies in their industries with high capitalization, and sometimes even the state, the probability of their bankruptcy is practically zero. Therefore, first-tier stocks are highly reliable.
- Blue chips bring their owners good dividends, because a stable company periodically distributes part of its profits to shareholders in the form of dividends.
- You shouldn't expect blue chips to grow quickly. The chart of such shares is very smooth, without jumps. Blue chips are not suitable for speculative aggressive strategies. However, there is a silver lining here, buying shares of the first tier is not an option that makes an investor nervous.
Results
Blue chips are the best choice for the novice investor. Not the highest, but stable yield together with low risks and high liquidity outweigh all possible disadvantages and give the investor-beginner the best idea about the stock market.