There is a reason blue-chip shares are known as such – they’re named after the top-end chips at the casino. Opting to buy these types of shares mean you get to buy into some major companies – that is, if you can afford it.
Blue-chip shares are investments in the bigger companies, usually listed in the stock market’s top 20. Generally, these types of shares have been trading for a long time and have a history of returning solid profits – which means regular dividends for their shareholders.
One of the advantages of blue-chip investments is that the dividends can be expected to grow over time if a business performs as forecast. The upshot? Your investment grows during times when share prices elsewhere may be stagnant, volatile or dropping.
Getting the blues
Anyone who can afford to buy into a blue-chip company can become a shareholder –from “mums and dads” to experienced share market investors. However, these shares don’t come cheap. Private investors can expect to pay from $5 to $100 a share. Often, as well, you are required to buy a minimum number of shares to get your foot in the door – this can restrict entry for many people.
Examples of blue-chip shares in Australia include:
- BHP Billiton
- Telstra
- Rio Tinto
- Coles Myer
- Woolworths
- The big banks including Commonwealth Bank and National Australian Bank
No risk? The safety first myth
It is the perceived safety of blue-chip shares that make them attractive to inexperienced investors, such as your “mums and dads”. While blue-chip shares are those with the highest market values, it doesn’t mean they are necessarily a safe bet – losses can still happen. For example, Rolls-Royce was once considered a blue-chip stock in the UK, but then collapsed in 1971.
As well, investors who choose the blue-chip path can make the mistake of sitting back waiting for the dividends to roll in and not diversifying their investment portfolio. Putting all of your eggs into one basket, so to speak, believing you’re on a sure thing can be dangerous. Should there be a downturn in a certain sector, those investors who haven’t diversified – people for example, who have shares in just one or two big companies such as NRMA or Telstra – will feel it the most if the downturn impacts the sector “their” company operates within. As with all investments, spreading your risk across companies, industries, even countries is one way to reduce your exposure and risk, if safety is the name of the game for you.
Become an expert
Just as when you are looking to buy a home you read the newspapers, go to see a number of properties, ask associates, friends and family for advice and start to scrutinise banks for good mortgage deals, before you invest you will also need to do some research: read the papers, talk to people, seek advice. Get familiar enough with the market to make up your own mind about the sectors and countries you want to put your money into – and base these decisions on real information, numbers, annual reports, industry trend data, share price fluctuations not gut feel. The Australian Securities Exchange online is also a great source of information. Employing a broker or financial planner is also a smart way to invest using “training wheels” till you are confident enough to go it alone (or have more time).
Drip feed your strategy
After consulting with an advisor and developing a strategy, these days most people make regular contributions to their investment funds via weekly or monthly direct debit. Shares can be bought by setting up a portfolio through a bank or financial planner or buying from the electronic share market. To buy electronically first you will need to sign up as a client of a stockbroking firm, such as CommSec, Goldman Sachs, JB Were, or E*Trade, amongst many others.
From time to time you will need to review your strategy and may wish to adjust the ratios you originally assigned to your investments. For example, instead of being 50 percent Australian shares, 20 percent USA investments and 30 percent Asian markets you may wish to drop the USA component and increase your buy in Asia, making your portfolio 50 percent Australian, 50 percent Asian markets. Your broker or financial advisor will be able to assist with this.