A blue-chip stock, if the New York Stock Exchange’s definition is to be trusted, is stock in a company with a well-recognized reputation for quality, consistency and the a long history of maintaining profitably in a variety of economic climates. The index that tracks blue chips is the Dow Jones Industrial Average. Because the 30 companies featured on the Dow Jones Industrial Average are established, industry leading companies, the price-weighted average of 30 blue-chip stocks are considered to be an indicator of the general health of the stock market.
The phrase, blue-chip is a reference to the most valuable chips in a poker game and came into use in the early 1920’s. Today, blue-chips, which are considered low risk relative to the market, are monitored closely and often reported on during discussion of the Dow Jones Industrial Average.
To be considered a blue-chip, a company should have at minimum four of the six characteristics determined by UBS Financial services.
- Market capitalization exceeding $5 billion
- A consistent record of profit growth, adept management and financial fortitude
- A leader within its market
- An established company that is well-esteemed, stable and has a reputation of producing good sand services of exemplary quality
- The company should be rated “Buy” by the Sponsor
- Analysis of the company’s record of earnings over an extended period and forecasts for future performance should produce a positive and stable outcome.
Novice investors may wish to invest in blue chip stocks as they are a good introduction to investing and are often held for long periods of time without selling as a result of their consistent performance over time.