What Are Blue Chip Stocks?
If you follow the stock market — even as a casual observer — chances are that you’ve heard the term “blue chip stock.” These stocks, known for their reliable returns, are often used as a benchmark to track the stock market. Keep reading to learn more about blue chip stocks and whether they’re a good choice for you.
- What Makes a Stock a Blue Chip?
- Which Companies Are Blue Chip Stocks?
- Why Invest In Blue Chip Stocks?
- How Do You Buy Blue Chip Stocks?
- What Are Blue Chip Funds?
A blue chip stock is the stock of a company that is considered to be a reliable performer, with a history of consistent growth. That’s not to say a blue chip stock will earn money every year, or that it will never decline in value. In general, though, blue chip stocks rise in value over time — and often outperform other companies in their industry, which may give you peace of mind if you’re concerned about whether blue chip stocks are safe. Because they perform well, however, blue chip stocks tend to cost more than other types of stocks.
Price isn’t the only feature that makes blue chip stocks different from the rest. They tend to pay smaller dividends than income stocks and greater dividends than growth stocks. Their prices also tend to be higher than growth stocks because they are considered less risky, but they don’t have the same potential for growth.
Check Out: How To Invest In Stocks: A Beginner’s Guide
There are no specific criteria for earning the label of a blue chip company, so there is no listing of all blue chip stocks. The 30 companies on the Dow Jones Industrial Average are all considered blue chips. These companies cover a diverse range of industries, from manufacturing to entertainment, and include powerhouses like Apple, Disney, Facebook and Exxon Mobil — all of which are considered top-10 blue chip stocks.
Some investors prefer to invest in blue chip stocks because of their history in being both reliable and stable. Although they may cost more to buy and pay smaller dividends than other stocks, they tend to be less susceptible to volatility in the market. Like other stock investments, blue chip stocks are not guaranteed, but they have a better chance of surviving and recovering from a crisis than less established stocks.
Learn More: Mutual Funds vs. Stocks: How Should You Invest?
Like any other stock, you can purchase blue chip stocks through a broker. As with any investment, you should understand what you are buying. Blue chips make for a good place to start since these companies have products that are so well-known.
Since they are generally large companies, blue chip stocks tend to be stable, so most people purchase them intending to hold them for a long period of time. Because they typically appreciate over time, investors are rarely disappointed with this strategy.
Blue chip stocks are a good place to start if you want to invest in a recognizable company that has a good chance of performing well. As with any other investment, you should understand what you are buying, diversify your holdings and be aware of fees.
Blue chip funds are a type of stock fund that invests primarily in blue chip stocks. Because they’re invested in blue chip stocks, they have similar advantages, like lower volatility, than other stock funds. They also don’t have the same potential for growth as funds that invest in companies within a specific market index.
Investing in stock funds offers several advantages over investing in individual stocks, including diversification, capital appreciation and liquidity. At the same time, stock funds increase and decrease in value depending on the performance of the stocks in the fund. It is possible to lose money on the investment. Dividends earned on stock funds are subject to taxes.
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This article has been updated with additional reporting since its original publication.
Last updated: May 25, 2021