A blue-chip stock refers to the stock of a large and financially sound public company. Many investors confine their investing activities to the issuers of blue-chip stocks. A company that issues blue-chip stock is likely to have the following characteristics:
Has a well-known brand name
Has a multi-billion dollar market capitalization
Has been in business for a number of years
Has significant market share in its chosen markets
Has a history of producing earnings even during market downturns
Is part of one of the more prestigious market indexes, such as the Dow Jones Industrial Average
Since this type of business has typically been operating for a number of years, it is more likely to have sufficiently stable cash flows that it issues dividends on a regular basis to shareholders. Consequently, this type of stock tends to attract income investors.
Since the issuers of blue-chip stocks are considered to be safe investments, larger funds tend to invest heavily in them. However, the impression that a stock has blue-chip status is based on its historical and current earnings. Over time, changes in the market or a lack of competitiveness could cause a blue-chip stock to decline in favor. In rare cases, a blue-chip company could even go bankrupt.