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, and the exact definition of what is required for blue chip status is vague. Broadly though, a blue chip company will be at or near the very top of its sector, will feature on a recognised index (like the ASX 200, Dow Jones, S&P500 or DAX), and will be or have a well-known brand.
Blue chip stocks are typically viewed as low risk, posting steady earnings and more often than not pay out dividends to investors. This puts them at odds with penny stocks. They are not immune to crashes and bankruptcy, but such occurrences tend to make the headlines: like the downfall of Lehmann Brothers and Enron, or the much-publicised problems with European banks during the last recession.