Green Chip Stocks

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.

BREAKING DOWN '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. Green Investing

    Investment activities that focus on companies or projects that ...
  2. Blue Chip

    A nationally recognized, well-established and financially sound ...
  3. Alternative Energy ETF

    An exchange-traded fund that invests in companies engaged in ...
  4. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  5. Green Economics

    Green economic theories encompass a wide range of ideas all dealing ...
  6. Green Tech

    1. Technology that is considered environmentally friendly based ...
Related Articles
  1. ETFs & Mutual Funds

    Challenges Faced When Analyzing Green Chip Stocks

    The fact that a green chip is not yet a blue chip should not alarm investors, but they need to be aware of the differences and challenges that can arise from assuming these are durable companies ...
  2. Markets

    Green Technology: A Solid Investment Choice?

    With global investing in green energy on the rise, there are abundant opportunities for environmentally responsible, financially sound investments.
  3. Markets

    Is it Time to Invest in Green Bonds?

    Green bonds have been growing in popularity at a rapid rate, but is it too early to invest?
  4. ETFs & Mutual Funds

    Going Green With Exchange Traded Funds

    As investors become more environmentally conscious, the exchange traded fund market is following.
  5. Investing

    Building Green For Your House And Wallet

    The earth-smart money is on these environmentally friendly housing projects.
  6. Managing Wealth

    What does "Blue Chip" Mean?

    Describing a business as “blue chip” comes from the game of poker, where blue chips are the most valuable.
  7. Personal Finance

    Should You Invest In A Green Home?

    Energy neutral homes are becoming real possibilities, but the financial point of view might not be so optimistic.
  8. Investing

    Forget Green Stocks, "Green" Will Do

    More and more companies are "going green", but that term, in itself, can be subjective.
  9. Investing

    Top 10 Green Industries

    Put a little green in your wallet by investing in these growing areas.
  10. Markets

    What's a Subsidy?

    A subsidy is a benefit given to an individual, business or institution, typically by the government. Subsidies are given to promote a social good or an economic policy. The government usually ...
RELATED FAQS
  1. Does investing in sustainable or "green" companies provide lower returns?

    To determine the kinds of returns that can be expected from investments in sustainable or "green" companies, the distinction ... Read Answer >>
  2. What are green investments?

    Green investments are traditional investment vehicles (such as stocks, exchange-traded funds and mutual funds) in which the ... Read Answer >>
  3. How do government subsidies help an industry?

    Understand how government subsidies can help an industry, on both the consumer and supplier side. Learn the potential drawback ... Read Answer >>
  4. What are the main types of chips produced by semiconductor companies?

    Learn about two ways in which chips in semiconductors industry are categorized: by functionality and by type of integrated ... Read Answer >>
  5. What are some examples of failed subsidies?

    Learn about the competing political and economic methods of evaluating government subsidies, and how to distinguish between ... Read Answer >>
  6. If my home runs power off the grid, what is the specific environmental impact?

    Going off the grid, or using solar energy, can result in much more than saving the homeowner money. It can help the planet ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center