Does the phrase “blue chip stock” seem synonymous with stocks that are too rich for ordinary people? Well, while they may be top-tier stocks, you don’t have to spend a lot to invest in them.
Here’s what blue chip stocks are, examples of stocks that fall under the blue-chip category and whether buying them makes sense for your investing goals.
What's the definition of a blue chip stock?
A blue chip stock is the stock of a reputable company that is a leader in its industry: Think large, established and financially solid.
The name is derived from the blue poker chip, which, as card aficionados know, is the highest value one in a basic set of red, white and blue chips. Likewise, these stocks are highly prized—not necessarily as the most expensive from a price standpoint, but because of their reputation.
In fact, while there are no sure things in investing, blue chip stocks are considered the least risky bets. These companies are among the top in their industry with credible reputations and healthy financials that have proven themselves able to weather economic storms.
Most commonly part of one of the big indexes, like the New York Stock Exchange (NYSE), Dow Jones Industrial Average (aka “the Dow”) and the S&P 500, blue chip stocks are also considered “large cap” stocks, a classification that refers to how many shares of stock a company has outstanding and the price of the stock.
However, not all large caps are blue chips. It’s a moniker reserved for only the best-known, most highly regarded companies. In fact because of the size of the companies they represent, blue chip stocks are sometimes referred to as “mega cap,” since their market capitalization or market cap (the total dollar market value of a company’s stock that is currently held by all shareholders) is in the billions of dollars. An accepted benchmark to be considered “blue chip” is $5 billion.
Another characteristic blue chip stocks typically share is that they post steady earnings, and therefore often pay dividends. A dividend is like a bonus distributed by a company to its investors, either as cash or more shares of stocks.
While any company can offer a dividend, it’s usually larger companies that are sharing their profits with you. A dividend payout represents a little reward or “thank you” from the company for holding their shares, since they realize you are unlikely to make a big profit—at least in the short term. While dividends aren’t assured, blue chip companies often pay them on a quarterly basis.
What are some examples of blue chip stocks?
Think of big sectors and the top, most successful brand names in those fields, and you’ve got your blue chips. While there’s no “official” list of blue chip stocks, you can bet that these types of leading companies are among those considered blue chip in their respective industries:
Food and beverage: Coca-Cola, McDonald’s
Healthcare: Johnson & Johnson, Novartis
Financial: Berkshire Hathaway, Visa
Retail: Walmart, Costco
Technology: Amazon, Facebook
As you can see, blue chip stocks span all industries, although they often have many different types of products and services or lines of business within the one company. In that way, a blue chip stock can seem like a way to diversify all on its own. That’s because even if one of its divisions is faltering, often another one might be soaring.
How can I invest in blue chip stocks?
As you might expect, these stocks typically don’t come cheap. So while you can buy individual shares of these companies, it is likely to cost you.
That’s why you might prefer to buy them as part of an index fund, which is composed of shares of all the stocks on a specific index, or an exchange traded fund (ETF), which is best described as a basket of investments that trade on the stock market just like a stock.
Both an index fund and an ETF are a smart way to invest in a diverse mix of these stocks, as each share consists of a variety of stocks, meaning which you are purchasing a large selection in one transaction. (Acorns portfolios include ETFs that provide exposure to thousands of stocks and bonds. Find out more.)
How to tell if blue chip stocks are right for you
Because of the name recognition of most blue chip stocks—and, of course, their reliable performance—they may be a great “beginner” stock as a way to get novice investors (and even younger people) interested in investing. But blue chip stocks can be a key part of any diverse investment portfolio.
Yet even if they seem like a safe way to dip your toe in investing waters, it’s important to know that they fall more on the conservative side. That means that you could miss out on some healthy gains that can be achieved by choosing a stock that is more aggressive.
However, while their value likely isn’t going to skyrocket overnight, it’s also probably not going to plummet since they are generally safe and stable companies. Yes, blue chip stocks can also go down in a market downturn, but they are less likely to fall as far or as fast since the companies are big enough to withstand most adverse economic situations.
While any investment can result in a loss, investors should bear in mind that the stock market has historically always recovered and continued to grow. That’s why it’s crucial to keep your time horizon and risk tolerance in mind as you choose the right mix of asset classes for your investments. A more aggressive portfolio can fall farther in a downturn and take longer to recover—but it also can give you impressive gains in a hard-charging market.
The key for any investor is to have the blend of investments that is right for you and your individual goals.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.