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Blue chips are the biggest, most stable, and often the most reputable companies in existence. The term comes from casino houses, which use colored plastic chips to represent the money patrons gamble with. Traditionally, blue chips were the most valuable color chip of all; but in gambling today blue chips are among the lowest valued chips, and also the most widely recognized. This is in standing with the financial industry's strong feeling for its own history: investors aren't going to start calling General Motors (GM) a "mustard yellow" stock just to match trends in casinos.
Blue chips are the dominant companies in their respective industries, bellwether behemoths whose sound business practices and established financial security have earned them broad recognition throughout the country, and around the world. Some examples of blue chips that will be familiar to everyone, savvy investor and first-time buyer alike, are Microsoft (MSFT), General Electric (GE), and AT&T (T).
Just as the companies that offer blue chip stocks have some traits in common with one another - massive size, market capitalization of over $1 billion, broad market penetration, and a long, stable history of excellence - blue chip stocks themselves share many traits, which distinguish them from other classes of stock. The primary traits of blue chip stocks are stability in price, regular dividend payments, and high liquidity.
Blue chips are not necessarily expensive, but their price is expected to remain relatively stable, with trends that are broad and easily predictable. We'd all like our stocks to continually grow more valuable, but the hard fact is that they do not. One of the benefits of owning a blue chip is that when it's price inevitably begins to drop, it will generally drop slowly and over a long period of time, allowing a shareholder to identify its downward trend and exit the trade without sustaining very heavy losses. Owners of small-cap stocks or growth stocks face the risk of losing a quarter of their investment in a day or two at the slightest tremor in the market: such losses are extremely rare in blue chips. On the other hand, uptrends are just as broad and slow in blue chips as down trends, and investors who want the challenge and thrill of locking in high capital gains will watch in frustration as growth stocks soar 5%, 10%, 20% or more on a good market day while their own investment inches up half a percent, or less, or not at all.
To counterbalance the lack of volatility, and the absence of large capital gains, many blue chip stocks offer a dividend payment as part of their allure. Dividends from blue chips may not be the highest out there, but the financial security of the company and virtual certainty of payment makes them very attractive to investors looking for stable income. Dividend payments from blue chips constitute a reliable income, which is delivered to shareholders no matter whether the stock price is rising or sinking.
Another advantage to investing in blue chips is their high liquidity, or high daily volume. These companies are so huge and have been around for so long that billions of shares have been offered and sold to the public, creating an enormous market for them. A few dozen thousand shares of an average stock may change hands in day, but the daily volume of blue chip stocks can easily exceed 50 million shares. That means that it is extremely easy to buy and sell blue chip stocks because there is always, always, always someone in the market who wants to sell or buy. Savvy investors with large accounts, good timing and good software can consistently make money day-to-day on the small dips and increases in price.
There are several categories of stock that share many traits with blue chips, such as large caps, income stocks and defensive stocks. But, above all, the defining characteristic of blue chip stocks is that the company issuing them is a massive and respectable mainstay in the economy. The Dow Jones Industrial Average, which is commonly referred to as "the Market," is composed of blue chip giants. Blue chips set the standard.
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Blue Chip Stocks & Company Classifications