What “blue-chip stock” means, and what it doesn’t
You will often read that an index rose “on gains in blue-chip stocks” or that a company “joined the ranks of the blue chips”. The phrase sounds precise, but there is no official list and no regulator that decides which companies qualify.
Where the term comes from
In poker, blue chips have traditionally been the highest-value chips on the table. The term moved to Wall Street in the early twentieth century to describe the shares of the most valuable, best-known companies.
How it is commonly used
When people say “blue chip” today, they usually mean a company that is:
- large, with a high market capitalization;
- well established, with many years of operating history;
- widely known, often a leader in its industry;
- financially stable by common measures, and sometimes a long-time dividend payer.
The Dow Jones Industrial Average, which tracks 30 large US companies, is often described as a blue-chip index. Membership in an index, however, is decided by the index provider’s own rules, not by any official blue-chip standard.
What it does not mean
“Blue chip” is a description, not a guarantee. Large, established companies can lose market share, cut their dividends, see their share prices fall for years, or in rare cases go bankrupt. Their stocks are still subject to market risk, and past stability does not predict future returns.
Concentrating a portfolio in a few famous names also reduces diversification. Many investors who want exposure to large US companies use broad index funds instead of picking individual stocks.
Questions worth asking
- How does the company make money, and is that business growing?
- How much debt does it carry compared with its earnings?
- What does its latest Form 10-K list as its main risks?
Key points
- There is no official definition or list of blue-chip stocks.
- The term usually describes large, established, well-known companies.
- Blue chips can still lose value. The label is not a safety rating.
This article is general information, not investment advice. It does not consider your personal situation. Consider speaking with a licensed financial professional before making investment decisions.
