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.