Blue-chip stocks are the shares of companies that are reputable, financially stable and long-established within their sector. Over time, the companies that are considered blue chip tend to change, so the exact definition of what is required for blue-chip status can be vague. However, a company that is considered blue chip will tend to be at or near the very top of its sector, feature on a recognised index, and have a well-known brand.
There is not a formal list of blue-chip stocks but, typically, the components represented in a well-known index will be considered as such and are referred to as blue-chip indices – this includes global indices such as the Dow Jones, the DAX, CAC 40 and Euro Stoxx 50. Indices like the FTSE 100 and S&P 500 contain a mix of blue-chip stocks and large- or mid-cap companies that aren’t considered blue chip.
Blue-chip stocks are subject to change, but some common examples include:
Blue-chip stocks are typically viewed as low risk because they tend to post steady earnings and, more often than not, pay out dividends to investors. A blue-chip stock tends to be trusted by investors, partly because it will have a large market capitalisation. They are the opposite of penny stocks, which tend to have a lower, less stable price and do not pay dividends as regularly.
Blue-chip stocks are not immune to crashes or bankruptcy, but such occurrences tend to make the headlines. As these stocks are primarily owned by the investing public, if there is some bad news in the market, it could cause substantial damage to the share price.
Blue-chip stocks are good for investors who want to see steady gains to their portfolio, but for speculators, they don’t tend to have the short-term movement needed for many trading strategies. Short-term traders are unlikely to see drastic day-to-day movements in the price of a blue-chip stock because of its relatively stable market capitalisation.
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