Blue-Chip Stocks: What They Are & How To Evaluate Them

Updated: Apr. 01, 2022By: Michelle Jones

A blue-chip stock is typically a stock issued by a massive company with a stellar reputation. A stock is a small piece of a company referred to as a share, and most stocks give you the right to vote on the future of a company. Learn more about blue-chip stocks and how to buy them.

Blue chip stock
zimmytws/iStock via Getty Images

Blue-Chip Stock Definition

A blue-chip stock is a share of a large, successful company with a high market cap and a great reputation. Blue-chip companies are usually household names, and they're well-established. Their stocks differ from other stocks in how well-known the companies are and in their solid fundamentals.

The phrase "blue chip" is a reference to poker, in which the blue chip is worth the most money.

Characteristics of a Blue-Chip Companies

  • Highly-well-known and reputable
  • Have a large market capitalization
  • Have a reliable history of sustained growth
  • Considered to have a robust future
  • Part of a major index like the S&P 500, the Nasdaq 100, or the Dow Jones Industrial Average
  • While they may not all pay dividends, but many do because they no longer need to invest their earnings back into growth.

Blue-chip stocks usually aren't as popular as momentum stocks, but they still have plenty of trade activity every day because they come from trustworthy names. Some may even be considered staples for most portfolios.

Advantages of Investing In Blue-Chip Stocks

There are plenty of investment options available, but blue-chip stocks offer some advantages over other assets.

  • Stability: blue-chip stocks tend to be more stable than other stocks because the companies have been around for a long time and have built a solid reputation.
  • Can be a safer bet during downturns: Some investors consider them a "safe haven" during economic downturns because they hold steady and generate stable profits, even though they might decline due to the downturn.
  • Quick to recover: Some investors believe blue-chip stocks tend to be the first to recover from a bear market, which is another reason to invest in them during an economic downturn. There hasn't been any official study proving this, but since they tend to be more stable than other stocks, it's easy to see why this is a widely held belief.
  • High liquidity: Most have a market capitalization in the tens or hundreds of billions of dollars, or even in the trillions, which means there is plenty of liquidity, making it easy to buy and sell shares.
  • Higher investor confidence: These companies tend to be leaders in their industries, with most of them being household names, so investors tend to invest with confidence that the company won't disappear or start to struggle anytime soon.
  • Dividends: Many companies whose stocks have achieved blue-chip status pay dividends, which means they provide a steady income for investors. Dividends are a part of the company's profits, and they're distributed to shareholders in the form of regular payments, often quarterly.

Tip: Blue-chip stocks are shares of large, reputable companies that are well-established and have a solid track record. They are also the top companies in their industry.

How to Evaluate a Blue-Chip Stock

To determine whether a stock is a blue-chip stock, you should look at several factors, such as:

  • Potential dividend payment
  • Rating on the company's bonds
  • Earnings growth
  • Whether they can pay off its debt

Most blue-chip stocks are leaders in the market they are in, so if you've never heard of the company, it probably isn't a blue chip.

How Do You Buy Blue-Chip Stocks?

The process for buying blue-chip stocks is the same as it is for buying other stocks. Seeking Alpha offers large amounts of data you can use to determine whether stocks are blue chips. If you want to learn how to buy stocks, you'll need an online brokerage account through a company like Robinhood or eToro. Stocks are generally sold on stock exchanges, although some companies do private placements. The easiest way to buy stocks is through an online brokerage account. Many online brokerages offer $0 trades, so they are a low-cost way to trade stocks.

After you have identified some blue chips to buy based on your research, you must decide how many shares to buy. Some brokers also allow you to buy part of a share if you can't afford an entire share, although most shares of blue-chip stocks are quite affordable for the beginner investor. Next, you choose the order type.

Blue-Chip Funds

If you don't want to pick out individual blue-chip stocks on your own, you might opt for a blue-chip fund. Index funds or exchange-traded funds offer a low-cost way to get exposure to a large number of blue chips, all in one place. ETFs are available on stock exchanges just like stocks, so they are just as easy to buy as individual stocks.

Index funds and many exchange-traded funds (ETFs) track an index like the S&P 500, and since blue chips are included in an index, you get a selection of bellwether stocks that are leaders in their industries. Blue chips have large market caps, so you'll want to look for a large-cap fund to seek out blue chips.

Not all the stocks included in every fund will be blue chips, but many will be. They offer instant diversification of your portfolio due to the large number of names they hold. However, you can also buy a fund that specifically targets blue chips, like:

  • Fidelity Blue Chip Growth ETF (BATS:FBCG)
  • ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL)
  • Monarch Blue Chips Core ETF (MBCC)

To determine whether a stock is a blue chip, funds use the same criteria we discuss in this article.

Are Blue-Chip Stocks Safe?

When trying to decide whether to invest in blue-chip stocks, you should consider the risks. On one hand, blue chips tend to be less volatile than other stocks because of how well-established the companies are. The risk of them going bankrupt is low for the same reason.

Tip: Blue-chip stocks may be safer than some other kinds of stocks because of how well-established the companies are, but there is always a risk that stock prices will go down, no matter how reputable a company is.

On the other hand, there is always a risk that blue-chip stocks will decline in value, just as there is with other stocks. The market moves in cycles from bull markets to bear markets, although bull markets tend to last much longer than bear markets. Blue chips will rise and fall as investors start to favor different sectors and types of stocks. However, their general long-term trend is usually up and to the right. Thus, a buy-and-hold strategy is best with blue chips because over time, they tend to rise due to their reputations and solid earnings growth.

There is never any guarantee of a positive return with any stock, but many investors see blue chips as a safer bet in the long term than some other types of stocks.

This article was written by

Michelle Jones profile picture
315 Followers
Michelle Jones is editor-in-chief for ValueWalk.com and a daily contributor for ValueWalkPremium.com and has been with the sites since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She lives in the Chicago area with her son, dog and two cats.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.