The term “blue-chip stock” is used as shorthand for the stock market’s biggest industry leaders. They are the A-list of stocks—you probably know their names, and they’ve been prominent for years and years. These are stocks like Amazon, Apple, and Berkshire Hathaway. Here is a closer look at where the term “blue-chip” came from, as well as how and why to invest in them.
Origin Of The Term
Where does the term “blue-chip” come from?
While responsible investing should ideally bear little resemblance to gambling, the term comes from poker chips. Traditionally, poker chips come in three colors denoting their value: white ($1), red ($5), and blue ($25). The “blue chip” being the highest value in a poker game, it came to describe the highest value stocks. Allegedly, the first instance of this term was in the 1920s by a Dow Jones employee, Oliver Gingold (this term is his only known claim to fame). Today, “blue-chip” is a widely used and understood term in investing.
One interesting side note is that while the terms “red-” and “white-chip stock” never gained traction as terms for mid- and small-cap stocks, the term “red-chip” has come into use to describe the largest publicly-traded Chinese companies.
Blue-Chip Stocks Defined
Blue-chip stocks are the most valuable, stable, and reliable industry-leaders stocks in the market. They have a very high market capitalization (the total value of a company’s shares), usually topping $10 billion. These companies are typically household names and the leader in their sector, or at least among the top three. They usually show a stable history of growth, and many pay dividends to their shareholders.
All of the stocks in the Dow Jones Industrial Average, for example, will be blue-chips stocks. That’s because the Dow Jones is a market index comprised of thirty of the largest publicly-traded U.S. companies.
Some Blue-Chip Examples
Some examples of current blue-chip stocks are Amazon (AMZN), Apple (AAPL), Disney (DIS), IBM (IBM), VISA (V), and Goldman Sachs (GS). However, blue-chip stocks are obviously not stagnant. Industry leaders rise and fall as time moves on, and today’s blue-chips will one day have new names. The Dow Jones Industrial Average was created in 1896 and today none of the original 12 industry leaders remain in the index.
Why And When To Invest In Blue-Chip Stocks
Those who are risk-averse or looking for a safe, reliable investment often turn to blue-chips. These are the stocks that are often best equipped to handle market downturns, and bounce back quickly. The fact that they often pay dividends is also a nice bonus.
However, investors shouldn’t make the mistake of presuming blue-chips are immune to failure. These companies can still go belly-up. Just take Lehman Brothers (formerly LEH) for example: once one of the biggest investment banks in the country, it suddenly went bankrupt during the 2008 financial crisis.
For those looking to invest in blue-chips, one easy way is to buy an ETF or mutual fund that replicates the Dow Jones Industrial Average. There are several that do this. For investors who want to purchase individual blue-chip stocks, Chaikin Analytics recommends consulting the Chaikin Power Gauge stock rating before buying.