What Is a Blue Chip Stock? A Complete Review

Oct 04, 2023 By Triston Martin

A stock of a large and reputable corporation is referred to as a "blue chip" stock. Most of the time, these are substantial, well-known, and financially secure businesses that have been in operation for a significant amount of time. These businesses also have consistent profits and often provide dividends to investors. A blue-chip stock is often well-known, has a market valuation that is in the billions of dollars and is typically either the market leader or one of the top three corporations in its industry. Blue chip stocks are among the most sought-after investments for various reasons, including those listed above. Investing in blue-chip stocks allows you to make low-risk investments in reputable and successful businesses. In addition to that, they are often generous givers.

Understanding a Blue Chip Stock

Even though dividends aren't required for a stock to be named a "blue chip," several blue chips holds a long history of giving growing or stable dividends. People think the word "blue chip" came from poker, where the most expensive chips are blue. A blue-chip stock is usually part of the most trusted market indexes or averages, such as the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500, and the Nasdaq-100 in the United States, the TSX-60 in Canada, or the FTSE Index in the United Kingdom.

It's not clear how big a company has to be called a "blue chip." A market capitalization of $5 billion is often used as a standard, but market or sector leaders can be companies of any size. The T. Rowe Price Blue Chip Growth Fund doesn't have a specific rule for what kind of companies is eligible. Instead, it focuses on large-cap and mid-cap companies that are well-established in their industries. But the average market value of the fund's holdings has been close to $100 billion in the past.

Blue Chips in a Diversified Portfolio

Even though blue chip stocks can be important parts of a bigger portfolio, they shouldn't usually make up the whole portfolio. Most of the time, bonds and cash are part of a portfolio with a wide range of investments. Investors should think about putting some of their money into both mid-cap and small-cap stocks. Younger investors can usually handle the risk of having more of their portfolios in stocks, even blue chips. On the other hand, older investors may want to protect their capital by putting more of their money into bonds and cash.

How Do I Buy Blue Chip Stocks?

A person who trades on the market has the option of purchasing individual blue chip stocks, mutual funds, or exchange-traded funds (ETFs) that invest in blue chip companies. Another option is to purchase an index fund that invests in blue chip stocks. Funds and exchange-traded funds (ETFs) may include holdings in various companies and asset types, including blue chip stocks. In other circumstances, the funds or ETFs could exclusively invest in blue chip companies. An ETF that replicates the DJIA (Dow Jones Industrial Average), which includes thirty of the most important blue chip businesses, is one example.

Is It A Good Idea To Invest In Blue Chips?

A diversified portfolio might have a lot of blue-chip stocks, which are the stocks of big, well-known companies with a lot of money. Investors can get exposure to blue-chip companies by buying individual stocks or mutual funds, or ETFs (Exchange-Traded Funds).

What Sets A "Blue Chip" Stock Apart?

Think of a blue-chip stock as something you'd show your parents: It looks good at first glance and backs up what it says. It's steady and reliable, and you can depend on it. Blue-chip companies have done well in both good and bad times, and their stocks have done well for a long time. These are things that most blue-chip stocks have in common:

Large market capitalization

The market capitalization of a company shows how big and valuable it is. Most blue-chip stocks are large-cap stocks, which means their market value is usually at least $10 billion.

Growth history

Blue-chip firms have had consistent growth over a long period and have positive prospects for the future. It's possible that they are not as attractive as rapidly expanding tech stocks, but that's probably just because everyone is already familiar with them.

A Market Index Component

Blue-chip stocks consistently perform well and are included in major market indexes such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100.

Dividends

Some blue-chip stocks don't pay dividends, but many of them do. Dividends are regular payments that a company makes to its investors out of the money it makes. Companies that pay dividends are usually old enough that they don't need to put as much money back into growing the business.

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