Blue-chip stock definition

Blue-chip stock refers to shares in large companies that have a reputation for financial stability, delivering dividends to investors on a regular basis, and being one of the top three firms to lead its sector in terms of market share. That said, there is no universally agreed definition for blue-chip stocks, nor is there an official list of corporations that have made this grade.

Why blue-chip?

For investors, blue-chip stocks are seen as a low-risk, dependable way of growing their money. Companies in this list include Apple, IBM, Coca-Cola, Disney, Wal-Mart and Nike. These brands are more than household names – they have become stock market darlings because they regularly deliver dividends and often report impressive levels of earnings.

Generally, longer-term investors are more attracted to blue-chip stocks than traders who are looking to execute short-term strategies. It is worth mentioning that these companies are not immune from the effects of a market crash, and there is always the possibility that a headline-grabbing scandal could send their shares into a spiral. The banking giant Lehman Brothers was a blue-chip stock before it become a high-profile victim of the 2008 financial crisis. Meanwhile, mobile phone manufacturer Nokia was relegated from blue-chip status after failing to adapt to changing consumer demands and losing ground to newer competitors such as Apple and Samsung.

Blue-chip investment strategies

It can be worthwhile to diversify an investment portfolio by owning blue-chip stock alongside shares in younger companies that have the potential for faster growth. Investors who are unsure about which blue-chip stock to back often choose to buy into exchange-traded funds that track a basket of these companies. Just as the old saying warns against putting all your eggs in one basket – a fancy way of saying don’t rely on one thing for future success – these funds can help dilute risk even further by following a multitude of corporations instead of one.