Blue Chip Stocks Meaning
Blue chip stocks are issued by companies possessing large market capitalization. Blue chip companies are market leaders. They provide good returns on stocks, offer dividends, and are considered safe investments.
These stocks are included in the investment portfolio to mitigate risk. According to legend, blue chip securities are named after the highest value chips used in the game of poker. Blue chip companies are already established; therefore, room for further growth is limited. While returns are guaranteed, they are lower than the other high-performance stocks.
Table of contents
- Blue chip stocks are publicly listed securities issued by leading companies that possess large market capitalization.
- Blue chip investments provide the desired results only if held long-term. They provide guaranteed but low returns in the form of dividends.
- These stocks are found on top stock market indices—S&P 500, Dow Jones Industrial Average (DJIA), NASDAQ, and National Stock Exchange (NSE).
The blue chip concept was first introduced in 1923 by Oliver Gingold. He was employed by Dow Jones. Some stocks were trading at sky-high prices, $200 and above—Oliver called them blue chip stocks. Since then, the term has referred to quality stocks with high prices. Therefore, blue chip securities are found in top stock indicesStock IndicesThe stock index, which is also known as the stock market index, is a tool used to determine the performance of shares/securities in the market and to calculate the return on the stock of their investment investors use it to have knowledge about the performance of investments and access the total value they possess.—S&P 500, NASDAQ, NSE, and DJIA.
Portfolio managersPortfolio ManagersA portfolio manager is a financial market expert who strategically designs investment portfolios. include blue chips for risk mitigation and stability. Ideally, investment portfolios should include diverse components—bonds, cash, blue chip securities, mid-caps, and small caps. Blue chip shares are a safe option—they can survive tough market cycles.
Even so, during the global recessionGlobal RecessionGlobal recession refers to a condition when the countries across the globe experience an economic downturn for an extended period. It is a form of synchronized economic downfall encountered by the various interrelated economies throughout the world. of 2008, many so-called blue chip companies went bankrupt—General Motors, Lehman Brothers, and several leading European banks. This indicates that even the best stocks struggle in extreme economic downturns. Among blue chip institutions, JP Morgan Chase managed to survive the 2008 crisis.
Blue-Chip Stocks in Video
The various features of blue chip securities are as follows:
- Large Cap Stocks: These securities are categorized as large-cap stocks—belong to companies with larger market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share..
- Low Risk: They are often considered safe investments—issuing companies are financially stable—efficient in clearing liabilities and debtsLiabilities And DebtsLiability is a broad term that includes all the money or financial obligations the company owes to the other party. In contrast, the debt is the narrow term and is part of the liability which arises when the company raises funds by borrowing money from the other party..
- Stable Growth: The blue chip companies are already established, further growth prospects are limited.
- Limited Assured Returns: These stocks often offer dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. to the stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.. While returns are guaranteed, they are lower than other high-performance stocks.
- Long-term Perspective: Blue chip investments provide the desired results only if held long-term.
- Dividend Payout: Most blue chip securities have a history of paying stable and rising dividends. Yet, dividend payouts are not mandatory for a security to be considered a blue chip.
Investing in Blue Chip Stocks
They are often called “rock-solid securities.” They show a stable performance during inflation, recession, depression, and other economic downturns. Even so, stability during market fall is not guaranteed. They are considered less risky when compared to small-cap and mid-cap.
Blue chip companies have impressive balance sheetsBalance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. , business models, and growth ratesGrowth RatesThe Growth rate formula is used to calculate the annual growth of the company for a particular period. It is computed by subtracting the prior value from the current value and dividing the result by the prior value.. Therefore, It is the go-to option for long-term investors who have a low-risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.. With time, blue chips grow steadily and offer high dividends. Investment advisors assist investors in selecting the right blue chip company.
List of Blue Chip Stocks
The US News lists the ten best blue chip stocks of 2022:
- Verizon Communications Inc. (ticker: VZ)
- Visa Inc. (V)
- Global Payments Inc. (GPN)
- Hormel Foods Corp. (HRL)
- Clorox Co. (CLX)
- Coca-Cola Co. (KO)
- Brown-Forman Corp. (BF.B)
- Becton, Dickinson, and Co. (BDX)
- Lockheed Martin Corp. (LMT)
- Walmart Inc. (WMT)
Some of the other promising blue chip stocks include:
- Apple (NASDAQ: AAPL)
- Berkshire Hathaway (NYSE: BRK.A) and (NYSE: BRK.B)
- Johnson & Johnson (NYSE: JNJ)
- American Express (NYSE: AXP)
Frequently Asked Questions (FAQs)
Blue chip companies are financially stable business entities. Most of them are market leaders. Since these organizations have a large market capitalization, superior reputation, and strong performance record, they are extensively safe for investment.
An investor can directly approach a brokerage firm to purchase blue chip security. Alternatively, one can invest in exchange-traded funds or mutual funds. ETFs pool investors’ funds into a basket of securities; this includes blue chip securities, as well.
Following are the best blue chip securities for 2022:
– Verizon Communications Inc. (ticker: VZ)
– Visa Inc. (V)
– Global Payments Inc. (GPN)
– Hormel Foods Corp. (HRL)
– Clorox Co. (CLX)
This article has been a guide to what is Blue Chip Stock & definition. Here we explain Blue Chip Stocks, their features, investing, and the list of examples from Canada, India, and the US. You can learn more about Equity Research from the following articles –