An Investor’s Guide to Blue Chip Stocks and How to Use Them to Boost Your Portfolio

Investments October 19, 2020

In many ways, investing is just like gambling. You need to take on a certain amount of risk while betting on the possibility that you win more than you lose. Investing and gambling even use some of the same terms.

Case in point? Blue chip stocks. Let’s find out what blue chip stocks are and how they can help in strengthening your investment portfolio.

Origin of the Term

Elite Studio/Shutterstock — In poker, blue chips hold the most value over all chips on the table

Blue chip stocks are those stocks that occupy the highest strata in the stock market. They are the stocks of established companies and giant corporations that have demonstrated a consistently strong performance in the market.

They’re often perceived as stable and reliable investments. Thus, they’re also much more expensive compared to other publicly traded stocks.

The term first found its way into the world of finance during the early ‘20s. The person who is believed to have coined the term was Oliver Gingold, a journalist writing for Dow Jones.

He thought of the term while watching a stock tape ticker report trades of shares that were valued at $200 and over. Gingold called those companies ‘blue chip’.

What Counts as a Blue Chip Stock

IgorGolovniov/Shutterstock — Berkshire Hathaway is currently the most expensive publicly-traded company in the United States

While there are no set guidelines that qualify which stocks are blue chip stocks, companies that are generally agreed to be blue chip share common characteristics.

First, blue chips tend to have a large market capitalization usually in the high billions as they typically are large corporations. Their valuation can be as little as $5 billion but most are valued at $10 billion and above.

Another thing blue chips have in common is that they’ve recorded decades of sustained growth. This is usually accompanied by steady stock appreciation over time or a sudden spike in share prices.

You’ll also notice that blue chips tend to occupy spots in major market indexes like the S&P 500, the Nasdaq 100, and the Dow Jones Industrial Average.

Benefits and Disadvantages

Jonathan Weiss/Shutterstock — Blue chips aren’t immune from bankruptcy as what happened with General Motors

There are many benefits to investing in blue chip stocks. There’s the fact that they tend to be less volatile because they benefit from economies of scale and have diversified their profit streams.

You can also expect blue chips to be more transparent about their operations and finances as they typically run by seasoned management teams. Of course, blue chips are also able to pay out steady dividends to their investors.

However, blue chips also come with some drawbacks. For starters, a share of a blue chip company is very expensive and their value grows at a slower pace as well.