Blue Chip Stock

A blue chip stock is a share in a large, well-known and financially sound company with a long record of reliable earnings, and often of paying and raising dividends. Blue chips are usually market leaders in their industries, with brands or businesses that have lasted through several economic cycles. Typical examples include the members of benchmark indexes such as the Dow Jones Industrial Average (DJIA) in the US or the FTSE 100 in the UK.

The term is informal. No regulator or index provider defines it, and there is no size or rating threshold a company must meet. In practice, almost every blue chip is a large-cap stock, but not every large company is a blue chip: the label implies a long history and a reputation for stability as well as size. Investors often treat blue chips as a core holding in a long-term portfolio, although they can and do fall in value.

Think of the big, familiar names on a high street that have been around for generations: the bank your grandparents used, the soft drink sold in every shop, the company whose products sit in most kitchens. People expect them to still be there in twenty years, even if they have a bad year now and then.

Blue chip stocks are shares in companies like that. Buying one is a bit like buying a well-made appliance from a famous brand: you pay a fair price, you do not expect miracles, and you expect it to keep working. That reputation is the appeal. It is not a guarantee, and some once-mighty names have eventually failed.

The phrase comes from poker, where chips of different colours stand for different amounts and blue chips traditionally carry the highest value. Wall Street borrowed it to describe the most valuable, highest-quality stocks. A frequently repeated story credits a Dow Jones employee with first using the phrase for stocks in the 1920s, but that account comes from company lore rather than contemporary records, and the expression was already appearing in financial writing earlier. The same word is now used outside the stock market for anything regarded as top quality and dependable, from "blue-chip" corporate clients to fine art.

• Size. A large market capitalization, typically tens or hundreds of billions of dollars.
• Track record. Many decades of operation and a history of profits through recessions and bear markets.
• Financial strength. A solid balance sheet and usually a high credit rating on the company's debt.
• Dividends. Many pay a regular dividend and raise it over time. S&P Dow Jones Indices tracks members of the S&P 500 that have raised their dividend every year for at least 25 consecutive years in its S&P 500 Dividend Aristocrats index.
• Liquidity. Heavy trading volume, so shares can be bought and sold quickly at narrow spreads.
• Index membership. Inclusion in leading benchmarks such as the S&P 500, the DJIA, the FTSE 100, the Euro Stoxx 50 or the Nikkei 225.

Indexes made up of a market's biggest companies are often called "blue-chip indexes". The DJIA, first published by Charles Dow in 1896 with 12 companies and expanded to 30 in 1928, is the best-known example. Its members are chosen by a committee rather than by a size formula, and the index is price-weighted, so it reflects a small, hand-picked group of US blue chips. Broader benchmarks such as the S&P 500 cover many more companies and are weighted by market value. Tracking these indexes through an exchange-traded fund (ETF) or mutual fund is a common way to own a basket of blue chips at once, as explained under stock market index.

Blue chips are often used as the stable centre of an equity allocation, held for steady total return and income rather than dramatic gains. They usually show lower volatility than small-cap stocks, and their dividends can provide income through weak markets. Many blue chips trade at moderate valuations and fit the profile of a value stock; others, such as large technology companies, are also treated as a growth stock.

The label does not remove risk. Mature companies may grow slowly, and their size can make it harder to adapt. History offers clear warnings: Eastman Kodak was removed from the DJIA in 2004 and filed for bankruptcy in 2012, and General Electric, a member of the original 1896 index, was dropped from the DJIA in 2018 after years of decline. During the 2008 financial crisis, shares of several long-established banks lost most of their value. Holding a mix of companies and sectors through diversification, rather than relying on a few famous names, remains the standard defence.

• Investor.gov (U.S. Securities and Exchange Commission): Stocks