Google, Alibaba and Amazon: What are blue-chip stocks and how do they fit in your portfolio?

What is a blue-chip company/stock?

The answer is simple: imagine a well-established company. A flagship in its industry with a proven track record of solid performance even during times of financial crises or recessions.

Now, if this company is even included in some of the major indices, for example, the S&P 500, then we are talking about a blue-chip company. From here, it is easy to understand what a blue-chip stock is: the share of a blue-chip company.

By the way, do you know where the term “blue chip” comes from? Surprisingly, it comes from poker, where players measure their stakes in multicoloured chips, one of the most valuable of which is usually the blue chip.

How to invest in blue-chip stocks and indices

You may have heard about market indices, such as the Standard & Poor’s 500 (S&P 500). Such indices track the performance of various companies’ stocks whose performance is then represented in points. The better the performance, the more points the index has, it is as simple as that. Just imagine, if the stock price of a company included in an index goes up, it results in a certain amount of “plus points” for that index. In real life, the bigger a company’s market cap, the more it influences the points of an index that it’s included in. The S&P 500 for example, tracks the performance of the 500 biggest companies listed on stock exchanges in the United States.

While it is not possible to directly invest in indices, exchange-traded funds (ETFs) allow investors to have their share derived from the performance of indices. Remember that indices track companies’ performance? Well, ETFs track the performance of these indices, so they basically track the results of the companies that are included in these indices. As said, you can trade and invest in ETFs, which might be an option for you if you want a small piece of multiple blue-chip companies at the same time. By the way, did you know that the S&P 500 is accessible through Bitpanda Stocks*?

Who should consider including a blue-chip company in their portfolio?

Historically, the price of blue-chip stocks tends to indicate steady (but usually not exponential) long-term growth, with relatively smaller ups and downs (i.e. lower volatility). Therefore, looking at past performance, it can be argued that blue-chip stocks can be a choice for investors who want to diversify their portfolio, who prefer lower risk and who are looking to invest over a longer time period.

With that said, for someone who is looking for riskier investments with higher-potential, short-term returns, blue-chip companies might not be the ideal option. In any case, it is generally advisable to diversify your portfolio: the more legs it stands on, the more stable your portfolio can (usually) become.

Blue-chip companies vs. smaller-cap companies

Blue-chips stand for reliability and stable growth but how do blue-chip companies compare to companies with smaller market caps?

In general, when it comes to volatility and risk, blue-chip stocks tend to offer a smoother ride than smaller-cap stocks. Consequently, potential returns for smaller companies can be higher than that of blue-chip companies. Think of it this way: it should be more difficult to double the revenue of an established company than to double a smaller company’s income.

Additionally, smaller-cap companies are less likely to pay out dividends than blue-chip companies, which could be a deciding factor in deciding how to invest. As dividends are a form of passive income that you can earn from your investment, you should check whether the company you’re about to invest in pays them out or not. On the other hand, small-cap companies may produce significant price gains over a shorter time period.

Finally, blue-chip stocks (the shares of blue-chip companies) tend to have a significantly-higher price than smaller companies’ stocks, making blue-chip stocks less accessible for retail investors. For example, the share price for Alphabet (GOOGL) is currently hovering at around €2,056, which can be challenging to fully pay for if you are a small investor who is just getting started.

H2: Invest in what you believe in with Bitpanda Stocks*

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Disclaimer:

*Bitpanda Stocks are contracts replicating an underlying stock or ETF. More information is available at bitpanda.com. This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.