IBM, Walmart, JP Morgan Chase, and DuPont Chemical. What do all of these companies have in common? Despite the fact that they are all in different industries, they are each known as a "blue-chip" company. Blue-chip companies, or "blue-chips" are the mature companies in the stock market that represent the stalwarts of industry—safe, stable, profitable, and long-lasting companies that represent relatively safe, low volatility investments. But where did this term come from and why not red chip or green chip?
What Blue-Chip Means
The term "blue-chip" originates with the game of high-stakes poker. In poker, gambling chips represent differing dollar values based on their color. White chips are often the least valuable, perhaps representing just $1 per chip. Red chips are often next in line, perhaps worth $5 apiece. The color blue signifies the chip that has the highest value on the table. This term was thus taken from the poker world and put to use as stock market terminology. In the investment world, a blue-chip company is well-known, well-established, and well-capitalized. Such a company is considered to be a leading company in its sector and produces dominant goods or services. Generally, a blue-chip company is seen as relatively impervious to economic downturns, which contributes to its qualities of generating consistent revenues and stable growth over time. It is also often considered a household name.
A blue-chip stock is the stock of a blue-chip company. If a stock is considered blue-chip, it is generally the market leader or one of the top performers in its sector. The market capitalization of a blue-chip company is usually in the billions of dollars. Typically, a blue-chip stock is a component of major stock market averages and indexes such as the S&P 500 index in the United States. It can also be listed on other major indexes throughout the world.
Historically, blue-chip companies were those that posted steady earnings results year after year. Blue-chip companies are therefore generally considered to be safer investments because of their ability to generate profits even during an economic downturn. A blue-chip is known to have a very stable growth rate, so it is considered to have less volatility than other companies that are not well-established. Generally, a blue-chip stock follows an index closely. For example, Apple was given blue-chip status in 2015, and it follows the S&P 500 and Nasdaq 100. The Dow Jones Industrial Index (DJIA) is comprised of thirty U.S.-based blue-chip companies.
During recessionary periods, a blue-chip company is often less impacted to adverse economic conditions. For example, Coca-Cola, a blue-chip company, may not suffer from a recession because it is a household name and many opt to drink its products, no matter what economic conditions are like. Nevertheless, stocks of any company can take a hit and lose their blue-chip status.