Blue chip definition

Blue chip is a term used in share dealing meaning a company (or shares in a company) that is reputable, financially stable and long-established within its sector. These companies are referred to as blue-chip stocks, or simply as blue chips.

What does it take to be blue chip?

Exactly what a company needs to achieve to attain blue-chip status is vague, and varies from investor to investor. Broadly though, a blue-chip company will:

• be at or near the very top of its sector
• feature on a recognised index (like the FTSE 100, Dow Jones, S&P500 or DAX)
• be a well-known brand, or own a well-known brand

Identifying a blue-chip stock

The companies considered to be blue chip will tend to change over time. 19 of the 30 companies listed on the Dow Jones Industrial Average – the most well-known blue chip stock index – in 1987, for instance, no longer feature 30 years down the line. 

There are some major companies that would once have been considered blue chip among those 19 – companies like Kodak, General Motors, and Sears. 

While it can be easy to lose your blue-chip status, it’s often much harder to finally become recognised as such. For example, Apple were not featured on the Dow Jones until 2015: three years after it first became the world’s biggest company by market cap.

Why are they called blue chips?

The term blue chip has its origins in casino gambling, and the tradition that blue chips tend to be the most valuable in a set. First used to mean highly priced stocks, its definition has changed over time to mean what it means today.

Is blue chip the same as large cap?

A blue chip stock will typically have a large market capitalisation, but that doesn’t necessarily mean that all large-cap stocks are also blue chip. This is because a company can have a high valuation but lack the stability and prestige to be considered blue chip.

What are the benefits of blue chips?

Blue chip stocks are popular among investors for lots of different reasons, but mostly because they:

• Are typically viewed as low risk
• Often pay out dividends 
• Are able to post steady earnings in both good times and bad

While they are not immune to crashes and bankruptcy, 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.