What Are Blue Chip Stocks?

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What Are Blue Chip Stocks?

Summary

  • Blue chip stocks belong to established, well-known companies that are among the top big names in their sector. They are reliable and their business is believed to be resilient enough to survive stormy economic conditions.
  • Blue chip stocks belong to big names, have a high market capitalization, are part of a major market index or average, and pay dividends to their shareholders.
  • In poker, blue chips have the highest value compared to other chips (red and white), just like blue chip stocks that are priced higher than the rest of the market. Oliver Gingold, a journalist and employee of Dow Jones, coined the term “Blue Chip” in 1923.
  • You can find most blue chip stocks by checking major market indices.

Table of Contents

  • What is a blue chip stock?
  • What makes a stock to be categorized as a blue chip stock?
  • Why blue chip?!
  • Where can you see the list of top blue chip stocks?

What is a blue chip stock?

Coca-Cola, Microsoft, American Express.

Despite their diverse nature, these are all familiar names that most of us grew up with. This is the most tangible characteristic of the companies we’re going to talk about in this article: a highly reputable business with a household name that is offering its shares to the public.

Blue chip stocks belong to established, well-known companies that are among the top big names in their sector. Blue chip companies are reliable and their business is believed to be resilient enough to survive stormy economic conditions. They are public companies, meaning their shares are available for trading on stock exchanges.

Blue chip companies are valued in billions of dollars and can go all the way up to trillions. Apple, Microsoft, and Alphabet (Google), for example, are the main blue-chip companies that have been enjoying the trillion-dollar club for a while now.

Blue chip companies also pay dividends to their shareholders, however, this may not always be the case. These companies pay a part of their profits in the form of monthly, quarterly, or annual payouts to their shareholders.

What makes a stock to be categorized as a blue chip?

The definition and characteristics of a blue chip stock have changed over time. We can say that the characteristics of a blue chip stock are defined by its company, some of which we will talk about in this section.

Well-established with a strong reputation

A blue chip company is an industry leader or is ranked among the top companies in its sector. 

These companies are big names in their field, come with a strong reputation, and are established enough to perform well in both good and bad economic conditions. This is why blue chip stocks are relatively stable and don’t experience sharp price movements.

It is also safe to say that a blue chip stock usually belongs to a company that is one of the firsts in its field as well. This doesn’t necessarily mean that the company is old as some of the fields are quite new and have started to grow in recent years.

High market capitalization and valuation

A blue-chip stock belongs to a company with a billion-dollar valuation. Market capitalization is the value of the total shares a publicly traded company is offering. It is calculated by multiplying the total number of shares by the price of the stock.

For example, Company A with 25 million shares trading at $100 has a market capitalization (or market cap) of $2.5 billion. Market cap shows us how much a public company is worth in the open market and can help us compare one company with another when considering investment options.

Now, what is the minimum market cap that would make a stock labeled as a blue chip?

It is generally accepted that a company’s market cap should be at least $10 billion, however, this number may change based on the sector.

Part of a major market index or average

Blue chip stocks are part of a major market index or average in their respective market. We have listed some of the major indices in the financial markets here:

  1. Dow Jones Industrial Average: consists of the stocks of 30 major US companies
  2. Standard & Poor’s 500 (S&P 500): comprises the stocks of 500 well-known US companies
  3. S&P/TSX 60 Index: tracks the performance of 60 major public companies in Canada
  4. FTSE 100 Index: follows the share price of the top 100 public companies in the UK
  5. Nasdaq-100: consists of the stocks of 100 major non-financial companies in the US
  6. Nikkei 225: baskets the stocks of the top 225 Japanese companies

Dividend payments

Another characteristic of most blue chip stocks is the dividend payments. Shareholders can enjoy monthly, quarterly, or annual payouts that can be paid in cash or stocks.

Dividends are a part of the company’s net profit which will be distributed between its shareholders. Considering the stability of blue chip companies and their stock prices, this factor can provide investors with a relatively stable source of income. However, you should note that the profit would be most probably less than higher-risk investments.

Why blue chip?!

But, why do we call these usually well-performed stocks a blue chip?

Oliver Gingold coined the term “Blue Chip” in 1923. He was a journalist and employee of Dow Jones and noticed at that time that the stocks of some specific companies traded above $200.

In poker, blue chips have the highest value compared to other chips (red and white), just like blue chip stocks that are priced higher than the rest of the market.

Where can you see the list of top blue chip stocks?

We mentioned above that blue chip stocks are a component of a major market index or average. So, you can find most blue chip stocks by checking these indices.

For instance, the NASDAQ 100 Technology Sector Index tracks the performance of tech-related companies in the NASDAQ 100 index. Let’s see some of the top companies in this index:

  1. Zoom Video Communications: The company behind the popular Zoom application
  2. Autodesk: Developer of main applications such as AutoCAD, 3ds MAX, and Revit
  3. NVIDIA Corporation: One of the lead chip makers in the world
  4. Alphabet Inc: Google!
  5. Apple Inc: You should know this one yourself!
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