What is a Blue-Chip Stock & How Do You Get There?

by | 7 Feb, 2019

McDonald’s. Coca-Cola. American Express. IBM.

What do these companies have in common?

Aside from being industry-leading multinationals, they’re all considered blue-chip. It’s a term many of us are familiar with, but have you ever wondered where it first originated?

 

Why blue-chip?

First of all, why blue? Why not white, or red? And why chip?

Well, the term actually derives from the world of high-stakes poker. Poker chips have different colours, which represent a particular value. White chips are the least valuable, then there’s the red chips, while the blue chips indicate the highest value at the table.

Back in the world of investment, blue-chip has come to represent a company which is well-run, reliable, and able to operate profitably during both the good times, and the bad. 

 

What is a blue-chip stock?

A blue-chip company’s stock is also considered ‘blue-chip’ in the investment world. The stock is viewed as a top performer in its sector, and is usually part of major stock market averages and indexes, such as the Dow Jones. The market capitalization (total dollar market value of a company’s outstanding shares) of a blue-chip company is typically in the billions.

 

How does a company gain blue-chip status?

While there are no hard and fast rules when it comes to presenting a company with blue-chip status, the company in question will often be:

  • Near or at the top of its sector;
  • A well-known brand;
  • Or featured on a recognised index, such as the S&P 500 or the FTSE 100.

Another broad indicator of blue-chip status is the company’s ability to weather an economic downturn. McDonald’s, for example, may not feel the pinch of a recession in quite the same way as a smaller, less recognisable restaurant chain.

 

What’s the benefit of investing in a blue-chip company?

For many investors, the benefit of investing in a blue-chip company comes down to stability. These companies are intelligently managed with strong business models, and offer security, even during periods of slowed growth.

Blue-chips are considered solid long-term investments with the potential to grow steadily over time, while also paying out dividends to shareholders. It’s little wonder Warren Buffett has so many in his portfolio!

 

See for Yourself

Add Coca-Cola, IBM, or McDonald’s to your Invstr fantasy portfolio and see for yourself how a blue-chip stock performs over time.

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