Loading the player...

What is a 'Blue-Chip Stock'

A blue-chip stock is the stock of a large, well-established and financially sound company that has operated for many years. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. Some examples of blue-chip stocks are IBM Corp., Coca-Cola Co. and Boeing Co.

BREAKING DOWN 'Blue-Chip Stock'

While dividend payments are not absolutely necessary for a stock to be considered a blue chip, most blue chips have long records of paying stable or rising dividends. The term is believed to have been derived from poker, where blue chips are the most expensive chips. 

A blue-chip stock is generally a component of the most reputable market indexes or averages, such as the Dow Jones Industrial Average, the Standard & Poor's (S&P) 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada or the FTSE Index in the United Kingdom.

How big a company needs to be to qualify for blue-chip status is open to debate. A generally accepted benchmark is a market capitalization of $5 billion, although market or sector leaders can be companies of all sizes. The $45.8 billion T. Rowe Price Blue Chip Growth Fund doesn't have a specific guideline for what type of company qualifies outside of focusing on large-cap and mid-cap companies that are well-established in their industries, although the median market cap of the fund's holdings is roughly $94.9 billion as of Dec. 31, 2017.

The Safety of Blue-Chip Stocks

While a blue-chip company may have survived several challenges and market cycles, leading to it being perceived as a safe investment, this may not always be the case. The bankruptcies of General Motors and Lehman Brothers as well as a number of leading European banks during the global recession of 2008 is proof that even the best companies may struggle during periods of extreme stress.

Blue Chips as Part of a Larger Portfolio

While blue-chip stocks are appropriate for use as core holdings within a larger portfolio, they generally shouldn't be the entire portfolio. A diversified portfolio usually contains some allocation to bonds and cash. Within a portfolio's allocation to stocks, an investor should consider owning mid-caps and small-caps as well. Younger investors can generally tolerate the risk that comes from having a greater percentage of their portfolios in stocks, including blue chips, while older investors may choose to focus more on capital preservation through larger investments in bonds and cash.

RELATED TERMS
  1. Blue Chip

    A blue chip is a nationally recognized, well-established, and ...
  2. Blue List

    The blue list is a daily listing of bonds currently for sale ...
  3. Blue Book

    Blue Book is a reference guide showing the prices for new and ...
  4. Purple Chip Stock

    Purple Chip Stock is a term coined by portfolio manager John ...
  5. Market Capitalization

    Market Capitalization is the total dollar market value of all ...
  6. Dual Interface Chip Card

    A dual interface chip card is a credit or debit card with an ...
Related Articles
  1. Investing

    Banking On Blue Chip Stocks

    Discover what makes blue chip stocks such attractive investments.
  2. Tech

    Top 5 Holding Analysis of Fidelity Blue Chip Fund

    Learn about the Fidelity Blue Chip Growth mutual fund, its portfolio makeup, and read a complete analysis of the fund's top five holdings.
  3. Investing

    Blue Chip Stocks Paying The Highest Dividends

    While picking individual stocks is risky, these blue chip companies have histories that show they can be good choices.
  4. Investing

    Facebook Wants to Build Its Own Chips

    The social network’s recruitment of chip designers indicates that it is keen to follow in the footsteps of Apple and Google.
  5. Retirement

    How Retirees Can Invest and Still Minimize Risk

    A retirement portfolio should focus on absolute return strategies to minimize risk.
  6. Investing

    The Top 5 Mid-Cap Value Mutual Funds for 2016

    Understand how mid-cap value stocks play a role in strategic asset allocation, and learn the best mid-cap value mutual funds to consider for 2016.
  7. Investing

    Apple Building Health-Focused Custom Processor

    Apple continues its efforts to build custom chips, this time focused on improved health care.
  8. Investing

    Is Intel in Trouble if Apple Makes Its Own Chips?

    Apple is reportedly gearing up to make its own chips, which could be a major blow to Intel.
  9. Investing

    In Blow to Nvidia, Tesla Speeds "Kick-Ass" AI Chip

    Tesla's in-house self-driving chip is close to being ready as the company plans to invest more in the effort.
RELATED FAQS
  1. What qualifies a company as blue chip?

    Learn where the term blue-chip came from, what a blue-chip company is and what attributes a blue chip has that differentiates ... Read Answer >>
  2. What is the difference between market capitalization and shares outstanding?

    Understand the relationship between shares outstanding and market capitalization and how market cap is interpreted to establish ... Read Answer >>
  3. What percentage of a diversified portfolio should large cap stocks comprise?

    Learn more about achieving optimal diversification of an investment portfolio, and specifically about the percentage of large-cap ... Read Answer >>
Trading Center