Blue chips: When size does matter

Fsp Invest, 06 Jan. 2014

Tags: blue chip, what is a blue chip, large caps, large capitalisation, what makes a blue chip, johannesburg stock exchange, jse, shares, market cap, market capitalisation, investing, small caps

The companies listed on the Johannesburg Stock Exchange (JSE) vary vastly in size and value. They stem from multi-million rand operations to multi-billion rand global giants. The largest companies on the JSE are known as blue chips. But what makes a company a blue chip compared to a smaller company on the stock market? Let’s take a closer look…

When it comes to buying shares for your investment portfolio, you can’t go past blue chips, Gareth Stokes in Fear, Greed and the Stock Market explains…

Blue chips on the JSE include resources company Anglo American, luxury goods producer Richemont and banking group Standard Bank.

Investing in companies like this is the safest way to play the stock market.

You’ll know if a company is a blue chip by its market capitalisation or market cap.

The market capitalisation is the value of a company’s shares multiplied by the number of shares in issue. For blue chip shares this will be several billion rands.

Blue chips are also known as large-caps (large capitalisation).

Another sure sign of a blue chip is if it’s included in the JSE Top 40 Index. This index covers the 40 largest companies listed in SA.

Traditionally, the size of blue chips gives them solid backing in the event of a disaster. But this makes it hard for them to rise much in percentage terms when times are better.

As investment guru Jim Slater said: “Elephants don’t gallop.”

If the share price of a Top 40 stock drops too low, it may be squeezed out of the Index on grounds of size and ‘relegated’ to the All Share Index.

But don’t forget the small caps

Because they’re relatively safe, blue chips should be the staple of your portfolio, amounting to perhaps 50% of your total shareholdings. However, you might also gain from the inclusion of smaller, more speculative growth companies.

This gives your portfolio diversification by size, which can also help to balance your investment risks.

If you enter the field of small companies or small caps, you should be wary. Although there are a few winners, there are many losers.

The truth is, many fund managers ignore the tiddlers because they’re hard to buy and sell in large quantities. They lack the institutional investment that can make all the difference to the share price.

At any given time, institutions – including pension funds, unit trusts and insurance companies – make up the majority of investors in this country.

But by investing in a small company, you can sometimes find a bargain the institutions have overlooked.

So there you have it, what blue chip are.

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