Glossary · Stocks and markets
Blue-chip stock
A blue-chip stock is a share of a large, well-established company with a long record of steady profits, often paying dividends, and known to almost everyone.
Also called: blue chip, blue chips, blue-chip company
In plain words
In poker the chips have colors: white for the smallest bets, red for more, and blue for the most valuable. By the 1920s Wall Street had borrowed the word, and shares of the biggest, most solid companies became blue chips.
There is no official list. A blue chip is usually a huge company that has been around for decades, leads its industry, earns steady profits through good times and bad, and often pays dividends. The 30 companies of the Dow Jones Industrial Average are the classic examples.
Blue chips are not risk-free. They are just less likely than small, young companies to disappear overnight.
Example
What makes a blue chip
Compare two imaginary companies:
- Old Reliable: founded in 1902, sells soap in 150 countries, $80 billion of revenue, a profit every year for decades, dividend raised for 40 years in a row.
- Bright Spark: founded in 2019, one product, $300 million of revenue, losing money while it grows, no dividend.
- Old Reliable is a blue chip; Bright Spark is a small growth stock whose shares could rise tenfold, or go to zero.
Blue chips trade the chance of spectacular growth for a better chance of still being around in 20 years.
One level deeper
Even giants fall. General Electric was a blue chip of blue chips and one of the most valuable companies in the world in 2000; by 2018 it had lost most of its value and was dropped from the Dow. Kodak, Sears and Lehman Brothers were household names before they failed.
Because they are large and widely owned, blue chips make up most of the value of indexes like the S&P 500, so a broad index fund is mostly a blue-chip fund.
Their shares usually swing less than those of smaller companies and tend to fall less in bear markets, but not always: in 2008 several blue-chip banks lost almost everything.
Why it matters
They are the core of most stock portfolios and index funds.
Their steady dividends make them popular with people who live on their investments.
Their fortunes tell you about the economy: when blue chips struggle, the trouble is usually broad.
A common mistake
Myth: Blue chips are safe.
In fact: Safer than most stocks, not safe. Their prices can halve in a bear market, and over the decades many former blue chips shrank or failed. Owning many of them spreads that risk.
Questions people ask
Why are they called blue chips?
From poker, where blue chips traditionally carry the highest value. The term has been used on Wall Street for top-quality stocks at least since the 1920s.
What are examples of blue-chip stocks?
Large, long-established leaders such as the members of the Dow Jones Industrial Average: companies like Coca-Cola, Johnson & Johnson, Procter & Gamble or Microsoft. There is no official list.
Do blue chips pay dividends?
Most do, and many have raised them for decades (see dividend aristocrats), but not all: some large tech companies paid none for years.
Read more on BigCapital
About the numbers
- This page explains a term. It is not investment advice.