What it is:
A blue chip is a nationally recognized, well-established and financially sound company. The term comes from blue poker chips, which have the highest value in the game.
How it works (Example):
Blue chip companies have several characteristics:
- They are usually large companies.
- They are usually older companies.
- They generally sell widely used products or services.
- They perform relatively well during economic downturns.
- They have records of long-term, stable growth.
- They usually pay regular dividends, and those dividends usually grow over time.
- They have reputations as management and industry leaders.
- They are usually very creditworthy.
IBM, AT&T, General Electric, Coca-Cola and DuPont are examples of blue chip companies.
Why it Matters:
Investors often consider the stocks of blue chip companies good long-term investments because blue chips tend to consistent returns. Higher stock prices and lower yields generally balance this perceived lower risk, however.
The two most popular lists of blue chip stocks are the Dow Jones Industrial Average and the Nifty Fifty. The Dow Jones Industrial Average is a list of thirty industry-leading companies chosen by the editors of the Journal. The Nifty Fifty are the fifty blue chip stocks that became popular before the bear market of 1973-1974.
Investors can purchase shares of blue chip companies directly or they can invest in derivative blue chip instruments that provide exposure to a variety of blue chip stocks. One example is a type of derivative blue chip instruments called Diamonds, which are exchange-traded securities that represent fractional shares of the underlying components of the Dow Jones Industrial Average.