A sure thing is difficult to find in the stock market, but a blue-chip stock might be as close to that as it gets. If you’re looking for an investment that offers growth potential with relatively low risk, blue chips can be a good place to start.
Finding Blue Chip Stocks
A blue chip is a large, financially sound company that has proved it can weather downturns in the market. These well-established companies have long track records of positive earnings and have paid dividends in both good times and bad. There are no definitive criteria for determining whether a stock is a blue chip, though, so it can be open to interpretation. The most recognized list of blue chips is the components of the Dow Jones Industrial Average.
The name “blue chip” comes from the game of poker; the blue chips have the highest value.
The Dow - Home of the Blue Chips
Established by journalist Charles Dow in 1896, the Dow Jones Industrial Average, often just called "the Dow," is composed of 30 blue-chip stocks from every important sector of the stock market except utilities and transportation. The average was created to help analyze the market by tracking the stocks of the biggest and most influential companies. It’s the world’s oldest stock index and a leading indicator of the stock market’s performance.
The blue chip stocks that make up the Dow change from time to time to reflect a changing market and a changing world, and can be considered the "bluest of the blue." For example, General Motors, a premier American manufacturing company, was long a mainstay of the Dow, but was removed in 2009. Some of the stocks in the Dow's index in 2014 are 3M, AT&T, Cisco Systems, Coca-Cola, Goldman Sachs, Home Depot, Intel, McDonalds, Microsoft, Nike, and Wal-Mart.
Blue Chips' Performance
Because of their solid financial standing and well-established positions in their respective industries, it’s no surprise that blue-chip stocks typically perform well. On June 1, 2009, for instance, the Dow's average was 8,763.13. On June 2, 2014, just five years later, it was 16,924.28 - a gain of just over 93 percent. By contrast, over the same period, the United States' GDP increased by 36.9 percent.
If you want to take advantage of this type of performance without having to select individual stocks, several investment firms have mutual funds comprised only of blue chips.
Benefits of Owning Blue Chips
The advantages of owning blue-chip stocks are fairly obvious: a track record of above-average rates of return and relatively low risk. Also, there’s no shortage of information about these companies in print and online. They’re well known and thoroughly analyzed, which makes it easy for the novice or casual investor to follow them.
On the downside, there’s usually a price to pay for quality and value, and such is the case with blue-chip stocks. The stock prices of these companies typically are higher than those of other companies. Also, while blue-chip stocks are seen as safer investments than many other stocks, you’re still taking a risk with your money. Like any other stock, a blue-chip stock can lose value, and the more heavily you’re invested in it, the more money you can lose.