Blue Chip

What Is a Blue Chip?

A blue chip is a nationally recognized, deep rooted, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue-chip companies are known to climate downturns and operate beneficially in the face of adverse economic conditions, which assists with adding to their long record of stable and solid growth.

Figuring out Blue Chips

The term "blue chip" was first used to depict high-priced stocks in 1923 when Oliver Gingold, an employee at Dow Jones, noticed certain stocks trading at $200 or more per share. Poker players bet in blue, white, and red chips with the blue chips having more value than both red and white chips. Today, blue-chip stocks don't be guaranteed to allude to stocks with a high price tag, however more precisely to stocks of high-quality companies that have withstood everyday hardship.

A blue-chip stock is generally a part of the most respectable market indexes or averages, for example, the Dow Jones Industrial Average, the Standard and 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. How big a company should be to meet all requirements for blue-chip status is available to discuss. A generally accepted benchmark is a market capitalization of $5 billion, in spite of the fact that market or sector leaders can be companies, all things considered.

A blue-chip company is a multinational firm that has been in operation for a number of years. Think companies like Coca-Cola, Disney, PepsiCo, Walmart, General Electric, IBM, and Mcdonald's, which are predominant leaders in their particular industries. Blue-chip companies have fabricated a respectable brand throughout the long term and the way that they have endure numerous downturns in the economy makes them stable companies to have in a portfolio.

The name "blue chip" came to fruition from the game of poker in which the blue chips have the highest value.

Numerous Conservative investors with a low risk profile or approaching retirement may typically go for blue-chip stocks. These stocks are great for capital preservation and their steady dividend payments turn out revenue, yet additionally safeguard the portfolio against inflation. In his book The Intelligent Investor, Benjamin Graham points out that conservative investors ought to search for companies that have reliably paid dividends for a long time or more.

The Dividend Aristocrat List distributed by Standard and Poor's includes large-cap blue-chip companies from the S&P 500 that have increased dividends consistently throughout the previous 25 years.

Blue Chip Stock Characteristics

Blue-chip stocks are viewed as less volatile investments than claiming shares in companies without blue-chip status since blue chips have an institutional status in the economy. The stocks are highly liquid since they are oftentimes traded in the market by individual and institutional investors the same. In this manner, investors who need cash spontaneously can certainly make a sell order for their stock realizing that there will constantly be a buyer on the opposite finish of the transaction.

Blue-chip companies are likewise described as having almost no debt, large market capitalization, stable debt-to-equity ratio, and high return on equity (ROE) and return on assets (ROA). The strong balance sheet fundamentals combined with high liquidity have earned all blue-chip stocks the investment-grade bond ratings. While dividend payments are not really fundamental for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends.

An investor can follow the performance of blue-chip stocks through a blue-chip index, which can likewise be utilized as an indicator of industry or economy performance. Most publicly traded blue-chip stocks are remembered for the Dow Jones Industrial Average (DJIA), one of the most well known blue-chip indices. In spite of the fact that changes made to the DJIA index are rare, an investor tracking blue chips ought to constantly monitor the DJIA to keep awake to date with any changes made.

Blue-Chip Stocks' Safety

While a blue-chip company might have endure several difficulties and market cycles, leading to it being perceived as a safe investment, this may not generally be the case. The bankruptcies of General Motors and Lehman Brothers, as well as a number of leading European banks during the global recession of 2008, is proof that even the best companies might battle during periods of extreme stress.

While blue-chip stocks are fitting for use as core holdings inside a larger portfolio, they generally ought not be the whole portfolio. A diversified portfolio as a rule contains an allocation to bonds and cash. Inside a portfolio's allocation to stocks, an investor ought to consider claiming mid-covers and little covers too.

More youthful investors can generally tolerate the risk that comes from having a greater percentage of their portfolios in stocks, including blue chips, while more established investors might decide to zero in additional on capital preservation through larger investments in bonds and cash.

Highlights

• Blue-chip stocks are viewed as somewhat safer investments, with a proven history of progress and stable growth.
• Blue-chip stocks are still in any case subject to volatility and disappointment, for example, with the collapse of Lehman Brothers or the impact of the financial crisis on General Motors.
• A blue chip alludes to a laid out, stable, and very much recognized corporation.