Green Chip Stocks

AAA

DEFINITION of 'Green Chip Stocks'

Shares of companies whose primary business is beneficial to the environment. Green chip stocks are generally likely to be concentrated in areas such as alternative energy, pollution control, carbon abatement and recycling. While the term is derived from “blue chip,” which refers to a stock that is an industry leader and consistently profitable, a typical green chip may have profitability challenges and a financial structure that is less stable than that of a blue chip. But despite these issues, green chip stocks attract significant interest from investors who are attracted to their “green” proposition and potential to be future market leaders in an increasingly environment-conscious world.

INVESTOPEDIA EXPLAINS 'Green Chip Stocks'

Green chip stocks are typically more volatile than the broad market. Although investors are usually willing to overlook their high valuations and financial limitations during bull markets, they are less willing to do so during bear markets and recessions.

The outlook for green chip stocks is also affected by the level of government subsidies and support available to them and/or to users of their end products. While higher subsidy levels can boost these stocks, reduced government subsidies can have an adverse impact on them.

For example, alternative energy stocks were among the best performers in the latter part of the 2003-07 global bull market, as the search for other energy sources assumed greater importance in an environment of triple-digit crude oil. But these stocks had a sudden reversal of fortune in the 2008 bear market, as investors exited them in droves due to uncertainty about the global recession and the collapse in conventional energy prices.

Solar power companies, a major sub-sector in the alternative energy space, were among the hardest hit, as the recession in Europe forced cash-strapped governments to cut back the level of subsidies offered to these companies. Spain, for example, accounted for half of the world’s new solar power installation in terms of wattage in 2008, primarily due to generous government subsidies designed to promote clean energy. But Spain’s worsening financial situation from 2009 onward led the government to severely curtail subsidies available for clean energy. As the nation’s market for solar power contracted significantly from its 2008 peak, manufacturers of solar panels and other components – which had ramped up production in anticipation of higher demand – were stuck with huge amounts of excess inventory, leading to a substantial decline in prices.

The growing popularity of green chip stocks has resulted in an increasing number of mutual funds and exchange traded funds that only hold green investments. Despite the growing number of alternatives available for investing in green chips, investors should ensure they understand the risks involved before plunging into this potentially rewarding but volatile sector.

RELATED TERMS
  1. Purple Chip Stock

    A term coined by portfolio manager John Schwinghamer to describe ...
  2. Sin Stock

    A stock of a company that is either involved in or associated ...
  3. Green Investing

    Investment activities that focus on companies or projects that ...
  4. Green Tech

    1. Technology that is considered environmentally friendly based ...
  5. Ethical Investing

    Using one's ethical principles as the main filter for securities ...
  6. Blue-Chip Stock

    Stock of a large, well-established and financially sound company ...
Related Articles
  1. Ethical Investing Tutorial
    Fundamental Analysis

    Ethical Investing Tutorial

  2. Green Investors Get Heard
    Insurance

    Green Investors Get Heard

  3. Going Green With Exchange Traded Funds
    Mutual Funds & ETFs

    Going Green With Exchange Traded Funds

  4. Go Green With Socially Responsible Investing
    Personal Finance

    Go Green With Socially Responsible Investing

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center