A ‘Blue Chip’ represents stock with good reliability and profitability. And their impacts on the stock market are far bigger than other shares of smaller companies. So the details of blue chips are worth our study.
Generally, blue chips are defined as stock in corporations that are huge, well-funded, and profitable under any circumstances. First, size of the companies that issue the shares must be ‘huge’. But how the companies are evaluated and marked as huge differs among different economies. In some markets, the size of the company accounted according to the total amount of its assets. For example, a company with assets evaluated at 3 million US dollars are bigger than a company with assets of 1 million dollars. For the so-called ‘huge’, they set a bar, above which the companies are marked as huge. In other markets, the size of the companies classified by the number of their hired staffs. A company with less 10 staffs is called micro business, while a company with over 10000 staffs is recognised as big company. In some other cases, a company’s size id determined by its business scale. A company whose business takes up over 80% market share or whose business lines cover several industries is seen as a big company. But the most proper way to measure the size of companies in the context of stock market is by the percentage of its total value, which is calculated by its issued shares, in all the companies listed in a stock exchange. For example, the total value of a company is 5 billions, and the total value of all listed companies in a stock exchange is 20 billions. So that company is thought to be huge, which meets the first requirement for ‘blue chips’, because the very company takes up about 1/4 in the market value. The last definition of the size of a company fits our context the best because only in that way can the influence of one company on the whole stock market be depicted.
Second, a company needs to be funded very well in order to join the ‘blue chips’ club. If a company is well funded, it means its funding liquidity risk is minimized. And this also shows the company’s cash flow can seldom be interrupted, so it ensures its stable operation. A company raises fund from banks or individuals, by issuing securities and bonds, and through other channels like leasing and financing. Further, if a company has the ability for those behaviours above, it directly shows that the company has good credit. Third, it is necessary for a company to win profits steadily in both good times and bad. This reflects that the company is doing good risk management because companies usually diversify their portfolios and control their risks in order to stay competitive all the time.
What is inferred from the discussion above is that, the blue chips has better stability than other shares that are not blue chips because the shares of a company is closely affected by the performance of the company and the companies meeting the ‘blue chips’ criterion are naturally operated very well and wins profits in al climates. By using the criterion given above, you can find ‘blue chips’ on a stock exchange and make adjustment dynamically by re-examining whether the companies still meet the criterion.
The index, which is a synthesized numerical output by assembling the shares of blue chips on a stock exchange, is a good way to track the market so that you can make money at the market profit ratio. A good analysis of the blue chips is quite helpful in making a good tracker investment.