What are blue-chip stocks?

What are blue-chip stocks?

Beginner

1st September, 10:14
Updated: 29th October, 16:59

Looking for a reliable, profitable stock to buy and hold for the long term?

Blue-chip stocks could fit the bill. In this lesson, we’ll explain what blue-chip stocks are, their typical characteristics, and where you can go in order to invest in them. We’ve also prepared a list of blue-chip stocks that could make for attractive buys.

What are blue-chip stocks?

Blue-chip stocks are stocks of companies with a long-lasting reputation for quality, reliability, and profitability. Blue-chip stocks also typically have lots of brand name recognition, and are used to make up some of the world’s most well-known stock indices, such as the Dow Jones Industrial Average. For these reasons, they’re attractive to investors even when market conditions turn volatile.

Why do investors look for blue-chip stocks?

By definition, the term “blue-chip” implies quality. Blue-chip stocks carry long track records of success and strong earnings growth. Investors putting their money in blue-chip stocks are looking for an investment option that will be reliable in the long term and generate steady profits.

What are the defining characteristics of blue-chip stocks?

1) They are big companies

To accrue the kind of reputation, name recognition, and track record required to meet blue-chip status, blue-chip stocks are by default very large companies. They’re leaders within their given industry, having a large market share, and they’re big in terms of market capitalisation, with a market cap that’s usually above $10 billion. Blue-chip stocks are almost always large-cap stocks.

2) They sit in prominent market indices

Blue-chip stocks are used to compile some of the world’s most famous stock market indices. You’ll find them in the FTSE-100, the S&P 500, and the Dow Jones Industrial Average. Each of these tracks a different number of companies, with the Dow following 30 of the top performing blue-chip stocks listed on stock exchanges across the USA.

3) They boast strong track records

Blue-chip stocks typically have demonstrably strong earnings growth over an extended period of time, years of leadership within their given industry, and a history of strong price gains. These factors demonstrate the economic strength of these companies, and also are contributing factors in having made them some of the most valuable stocks in the world.

4) Blue-chip stocks are viewed by investors as a safe haven

Investors have the reassurance that blue-chip stocks rack up big gains during bull markets but also often hold up well during bear markets. This is hard to guarantee, as nobody knows exactly what the next downturn will bring, but blue-ship stocks tend to be safer bets when the markets turn South than smaller stocks. That being said, the safest place to be during a bear market is in cash. If you choose to hold a blue-chip stock during market storms, you will still risk seeing the value of your portfolio plummet.

Here are some examples

If you want to add some blue-chip stocks to your portfolio, here are some options that are worth considering. 

1) Alibaba Group (BABA)

Alibaba is Chinese technology giant, combining online retail services with other technology and Internet services. The stock had a gigantic $4.7 trillion market cap and as of early June 2020, sat just 3% off its all-time high. 

2) Johnson & Johnson (JNJ)

The maker of medical devices, pharmaceutical products, and consumer products has been a component in the Dow Jones Industrial Average since 1997. Johnson & Johnson stock surged to an all-time high in April 2020, even as other companies’ stock was in free fall because of the coronavirus pandemic.

3) Facebook (FB)

The social media conglomerate went public in 2012 and quickly grew into one of the largest and influential blue-chip stocks on the market. Facebook’s stock staged a huge comeback following the brief market correction caused by the COVID-19 pandemic, vaulting to an all-time high in May 2020.

4) McDonald’s (MCD)

The largest restaurant chain in the world with more than 37,000 locations in 120 countries, McDonald’s employs nearly 2 million people around the world. Another stock that showed resilience amid the coronavirus-induced market correction of early 2020, McDonald’s sat just 9% off its all-time high as of June 2020.

How do I find blue-chip stocks?

Several different investment websites offer screening tools which let you search for blue-chip stocks based on parameters such as market cap, earnings per share, and revenue growth. But you can also peruse the best blue-chip stocks right here, thanks to our monthly lists of top-performing blue-chip stocks.

Visit this guide for more information on how to find blue-chip stocks > 

Now that you have a better understanding of blue-chip stocks, keep learning by clicking to check out our next lesson, this time on penny stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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