What is a Blue Chip Stock?
A blue chip stock is the nickname for a stock that is thought to be a relatively safe investment. A blue chip stock gets its name from poker where the blue chips are usually the most valuable.
Blue chip stocks are typically a less volatile investment than owning shares in companies without this status. Blue chip stocks, also known as bellwether or large cap stocks (because the companies have a market capitalization of $1 billion or more), tend to rise and fall in union with the stock market in general.
The Dow Jones Industrial Average
The most famous of the blue chips make up the Dow Jones Industrial Average. The “Dow” consists of the 30 largest and most widely-held public companies in the United States. Some of the companies in the Dow include Coca-Cola, American Express, IBM, General Electric, and Walt Disney.
Attributes of a Blue Chip Stock
Not all blue chips are members of this index, though. The generally accepted definition of a blue chip company is that it is a recognized leader in its industry with a long history of stable earnings and dividend payments to its investors. Blue chip companies are in sound financial shape with strong balance sheets and credit ratings and are seen as leaders in their industries. These companies generally are favorably regarded by investors.
While most blue chip stocks do not offer an opportunity for dramatic capital gains, they can make sense for investors who are looking for relative price stability, regular (and often growing) dividend payments, and liquidity. Blue chip investors expect steady growth from these companies as they tend to closely follow the growth of the S&P 500.
While investing in blue chips may not seem as exciting as some of the “hot stocks” you hear about, they may have a place in your portfolio as they offer solid long-term rates of return with decreased downside risk. They offer the stability of a mutual fund without the ongoing management fees.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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