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What Are Blue Chip Stocks (Explained: All You Need To Know)

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What are Blue Chip Stocks?

What’s important to know about them?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you what Blue Chip Stocks are and why they are important!

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Let’s get started!

What Are Blue Chip Stocks

In investing, a blue chip stock refers to a financially stable and very large company that has a great reputation and is a top performer in its industry.

Typically, blue chip stocks are worth billions of dollars and have been around for a long time.

The term “blue chip” comes from the poker card game where you generally have a set of white, red, and blue chips.

In poker, the blue chips are the ones with the highest value.

As a result, blue chip stocks are those stocks that have the highest quality, reputation, and financial stability.

One important reason why blue chip stocks are attractive is that many regularly pay dividends to their shareholders.

As a result, investors looking for passive income will invest in dividend-paying blue-chip stocks.

Another reason why blue chip stocks are attractive to many investors is because these companies have the financial capacity to survive different economic cycles.

Investors looking to invest their money in “safer” stocks will choose blue chip stocks.

Keep reading as I will further break down the meaning of a blue chip stock and tell you about its benefits.

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Blue Chip Stock Characteristics

The term “blue chip stocks” refers to stocks of corporations that are highly profitable and have dependable earnings.

These companies are generally leaders in their industry (or within the top positions), have a great reputation, and are well-known in the market.

Although there is no exact definition of what a blue chip stock refers to, many consider a particular stock as a blue chip if it has some of the following characteristics:

  • It has dependable earnings
  • Its market capitalization is in the billions
  • It regularly pays dividends
  • It is a well-known brand or household name
  • It is a component of market indexes or averages 
  • It has survived different economic cycles and challenges
  • It has a great reputation in the market

For example, Coca-Cola is considered a blue chip stock.

If you look at Coca-Cola, you’ll notice that it has all of the above characteristics.

In other words, it has been around for a long time, it has survived many economic downturns, it regularly pays dividends, it has a valuation in the billions, it has dependable earnings, and so on.

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Blue Chip Stock Investments

There are many reasons why investors will consider purchasing blue chip stocks in their portfolio.

The first reason why many investors prefer blue chip stocks is that they are considered as “safer” investments.

The reason why they are perceived as safer stock investments is that these companies have been around for a long time and are able to generate consistent revenues in good times and bad times.

Investors will also choose blue chip stocks as many of them pay dividends and have been paying dividends for many years.

Investors looking for income stocks and passive income will love investing in blue-chip companies having a long history of paying dividends.

Another reason investors may purchase blue chip stocks is that it allows them to diversify their portfolio.

Having a well-diversified portfolio where you manage your risk is always a good idea.

If you have a lot of exposure in growth stocks, you may want to counter-balance that with blue chip stocks allowing you to reduce your portfolio’s overall risk.

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What Are Blue Chip Stocks FAQ

What does blue chip stock mean?

The term “blue chip stock” refers to the stock of well-known companies, that have a great reputation, have been around for a long time, and have reliable earnings.

For example, IBM is considered a blue chip stock as it has been around for a very long time and has reliable earnings.

What is the origin of the name “blue chip stocks”?

According to the Dow Jones company folklore, the first person that coined the term “blue chip stock” was Oliver Gingold, an early employee of Dow Jones.

In the 1920s, it seems that Oliver Gingold was standing by the stock ticker seeing stock prices soar to over $250 per share.

At that moment, he told one of the stock brokers there that he would go and “write about these blue-chip stocks”.

At that time, the term blue chip was used to refer to expensive stocks, whereas today, we refer to highly valuable companies.

Where does the name “blue chip” stock come from?

The name “blue chip” stock comes from the blue chips found in the poker game.

A classic poker game generally has white, red, and blue chips.

The blue chips are the ones that are worth the most.

As a result, blue chip stocks are those that are the most valuable companies in the market.

Why invest in blue chip stocks?

Although every investor should carefully assess their investment strategy and overall plan, the main reasons why investors choose blue chip stocks are:

  • To invest in a company that offers consistent returns
  • Take less risk
  • Earn dividend income
  • Invest in a company that has the potential to operate for many years to come

What makes a stock a blue chip?

Although we do not have an exact definition of the term “blue chip” stock, the main characteristic of these stocks are:

  • Companies with a large market capitalization
  • Companies with a long history of growth
  • Companies that are a component of market indexes
  • Companies that pay dividends
  • Companies that generate strong earnings 

What are some examples of blue chip stocks?

Here are some examples of blue chip stocks:

  • 3M (MMM)
  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • American Express (AXP)
  • Apple (AAPL)
  • Bank of America (BAC)
  • Coca-Cola (KO)
  • Costco (COST)
  • Disney (DIS)
  • Goldman Sachs (GS)
  • Home Depot (HD)
  • IBM (IBM)
  • Johnson & Johnson (JNJ)
  • McDonald’s (MCD)
  • Microsoft (MSFT)
  • Nike (NKE)
  • Starbucks (SBUX)
  • Verizon (VZ)
  • Visa (V)
  • Walmart (WMT)

Are blue chip stocks always safe investments?

Generally, blue chip stocks are perceived as safe investments.

However, it’s not a guarantee.

Every company is exposed to various risks and can eventually go bankrupt.

A notable example of a blue chip stock that went bankrupt is General Motors during the 2008 recession.

You also have Lehman Brothers, the fourth largest investment bank in the United States, filed for bankruptcy in 2008 due to its exposure to subprime mortgages.

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Takeaways 

So there you have it folks!

What is the meaning of blue chip stocks?

In a nutshell, the term blue chip stocks refer to highly esteemed stocks in the stock market that tend to have a solid financial position.

Public companies with a large market capitalization, great market reputation, and highly valued shares are considered blue chip stocks.

The main features of blue chip stocks are that they have assured returns, are credit-worthy, are lower-risk investments, and are household brand names.

Investors will invest in blue chip stocks to diversify their portfolio, earn dividend income, invest based on a long time horizon, and hedge against the impact of inflation or recession.

Now that you know what a blue chip stock means and why it’s important, good luck with your research!

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Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

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