In the trading world, there are almost as many ways to classify stocks as there are stocks in the market itself – including blue chip stocks, which are some of the most sought-after stocks on the exchange.
If you don’t think you’re familiar with the term, think again – you’ve probably already encountered blue chip stocks whether you realize it or not. The Dow Jones Industrial Average, for example, is nothing more than a price-weighted market index of 30 blue chip stocks. You also probably shop at or do business with companies represented by these stocks on a regular basis.
This article will talk about blue chip stocks – what they are and how you can include them in your trading strategy.
Blue Chip Stocks Explained
To learn more about these stocks, we have to first look at who they represent. Blue chip stocks represent shares in blue chip companies, or established companies with national reputations known for stability, profitability, and leadership in their markets.
A blue chip company is viewed as a leader in its field. It typically is large – with a market capitalization (share price times the number of outstanding shares) of $5 billion or more – with a strong financial background and a history of solid earnings over a long period of time. Plus, these companies have reputations for having talented management, quality products and services, and stability.
It’s like in sports – blue chip players are athletes who are the best of the best, with recognizable talent and value to a team. You want to have at least a few blue chips on your team, and the same applies to the market.
Is there an actual formula or set of rules for coming up with what is and isn’t a blue chip stock? That depends on who you ask; I personally believe a blue chip is a company that, among other things, is a pretty safe investment because it has been around for a while and will continue to be around for a while just because most people can’t envision it ever going away.
Looking at Examples
What are some examples of blue chip stocks?
One great place to start is the Dow Jones Industrial Average (DJIA). This is a market index – or a way to measure how well the market is performing. Take 30 high-performing stocks in multiple sectors, do a little bit of math, and there you have it – a snapshot of the relative strength of the market.
What are some names we see in DJIA? There are some pretty big heavy-hitters and some of the country’s most recognizable companies on this list, including:
- Bank of America
- Procter & Gamble
- Walt Disney
All of the above can be considered blue chip stocks. There are other blue chips in the market that aren’t on that list, like Berkshire Hathaway, but for the most part, when you think blue chips think DJIA.
What Can You Do With Blue Chip Stocks?
This is the big question: Why should you even care?
It turns out there are multiple reasons to go with blue chip stocks, or at least have some in your portfolio. One major reason is stability. These companies, as you can imagine, aren’t going anywhere anytime soon. They can turn a profit regardless of if the economy is good or bad, and offer stability – particularly in a market marked by volatility.
Blue chip stocks are also safe when compared to other stocks. You can use these stocks to hold and retain wealth better, on average, than you can a basket of assorted stocks. Blue chippers offer consistent growth, which is always a plus.
Investors also turn to blue chip stocks for dividends, or payments made to shareholders per share from a company’s revenue. Let’s say you own 1,000 shares of Wal-Mart (WMT). Wal-Mart’s dividend currently is around $1.59 per share, per year. So, for every share you own, you’ll receive $1.59 – which means every year you’ll get paid $1,590 from Wal-Mart.
Dividends are great ways to generate income, which is why many investors turn to blue chip stocks. Most blue chips (although not all) have dividends.
Finally, you can use blue chip stocks as bellwethers, or stocks that reflect the overall performance the industry in general. For example, Microsoft (MSFT) is a bellwether for the tech industry; Caterpillar (CAT) is a bellwether for the construction industry. If bellwether, blue chip stocks do well, you can guess that other companies in the industry will probably do well, too.
Blue chip stocks may not offer the flashy, massive one-day gains as high-growth stocks may, but they are pretty reliable sources of income, growth, and stability. These qualities make blue chippers definitely worth looking into, especially for beginners who want to start conservatively and work their way up to bigger and riskier investments.