Glossary
Blue-chip stock
A share in a large, long-established, financially sound company with a record of steady earnings, often paying dividends.
A blue-chip stock is a share in a large, well-known company with a long record of profitability, a strong balance sheet and, often, a history of paying and raising dividends. The name borrows from poker, where blue chips traditionally carried the highest value. Blue chips make up the core of major indexes such as the Dow Jones Industrial Average and are what many people picture when they think of "the stock market."
What makes a company blue chip
There is no official list or threshold. The label usually implies:
- Size: market capitalization in the tens or hundreds of billions of dollars.
- Durability: decades in business and a leading position in its industry.
- Financial strength: steady cash flow and, typically, an investment-grade credit rating.
- Liquidity: shares that trade in very large volumes with tight bid-ask spreads.
What the label does not mean
"Blue chip" describes a company's standing, not a guarantee about its stock. Blue chips can fall sharply in bear markets; many lost 40% or more in 2008. Some former blue chips have declined for years or failed outright, as General Motors did when it filed for bankruptcy in 2009 and Lehman Brothers did the year before. A great company can also be a poor investment if bought at a very high valuation.
Their appeal for many investors is relative stability and income, at the cost of slower growth than smaller companies may offer.