How Lithium Pair Galaxy Resources Limited and Orocobre Limited Exploded into the ASX 200

Lithium. It mightn’t have captured the same level of attention as the infant formula boom did in 2015, but the returns have certainly been just as spectacular – if not more so.

Lithium miners are in hot demand amongst investors right now thanks largely to soaring lithium prices. The commodity soared in price because of the increased use of lithium-ion in batteries, used to power devices such as smartphones and vacuum cleaners, as well as cars and even homes.

In fact, so large are the returns that have been generated by some of the companies in the sector that two are to be included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) index, which tracks 200 of the biggest and most widely followed businesses on the ASX!

Galaxy Resources Limited (ASX: GXY) is one of the businesses that has made its way into the ASX 200 cohort. With shares priced at 40 cents, the miner boasts a market capitalisation of roughly $686 million. The shares have exploded in price since the beginning of the year, rising 243%, and are up an astonishing 1,363% over the past 12 months.

Meanwhile, Orocobre Limited (ASX: ORE), which carries a market value just shy of $800 million, will also be included in the ASX 200 group after the close of trading on 16 September 2016. Its returns haven’t been quite as spectacular as Galaxy Resources, but it has still returned 64% so far in 2016 and 135% since this time last year.

A number of other businesses will also be added to the ASX 200 index, while businesses such as Mesoblast limited (ASX: MSB) and Cover-More Group Ltd (ASX: CVO) will have their names removed from the bourse.

Indeed, there is potential for these lithium shares to continue rising, but investors do need to ensure they do their own due diligence. While a firm understanding of the lithium (and mining) industries could support buying the shares, a desire to capture similar returns to those generated by the pair over the past 12 months is no good reason to buy (we’d all like it to happen, but there is no guarantee!).

An investment in the lithium industry is by no means without risk. As it stands, it is likely that there is at least some speculation built into the share prices, and a retreat in lithium prices would almost certainly weigh on the shares.

A safer bet for most investors would be to consider investing in more familiar businesses that have the potential to grow their share price and pay out a healthy dividend yield. These three blue-chip shares could be a great place to start. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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