Written by:
Nika
Written on:
28 December 2023
Investors and traders on the stock market can choose between thousands of stocks from different companies. Some of these companies are multinational conglomerates with hundreds of thousands of employees and billions in annual profits, while others are small startups with no profitability on the horizon.
If you are familiar with stock terminology, you might have heard the term “blue chip stock” before and may be wondering what it exactly means.
In general, a blue chip stock is a stock that is part of a major stock index, such as and is characterized by slow YoY revenue growth and a stable operational performance.
Many institutional and long-term investors buy these stocks as they have a solid basis of performance and many of them also pay dividends, which is always a welcome sign for prudent investors.
Blue Chip Stock Definition
A "blue chip stock" refers to a type of stock issued by a large, well-established, and financially stable company with a reputation for reliability and stability. These companies are typically leaders in their respective industries and have a history of consistent performance and financial strength.
Here are some key defining characteristics of a blue chip company:
- Financial stability - Blue chip companies generally have strong balance sheets, with low debt levels, consistent cash flows, and solid financial health. They can weather economic downturns and market volatility better than many other companies
- Market leadership - Blue chip companies typically hold a sizable share of their respective markets and are major players in the industry
- Long track record - Blue chip stocks typically have a long history of operation, often spanning many decades. This long track record can provide investors with confidence in the company's ability to adapt and thrive over time
- Dividends - many blue chip companies pay dividends to their shareholders, which gives investors another incentive to invest
- Lower volatility - Blue chip stocks tend to be less volatile than smaller or less-established companies. Their stability and market leadership can make them a more conservative investment choice
- Liquidity - Blue chip stocks are usually highly liquid, meaning there is a robust market for buying and selling their shares. This liquidity can make it easier for investors to enter or exit positions without significantly affecting the stock's price
Blue Chip Stock Example - Apple Inc (AAPL)
To better understand what a blue chip stock is, we can use the example of Apple Inc, which is the largest public company in the world and fits the definition of a blue chip stock perfectly.
By continuing the point laid out in the previous section, we can evaluate Apple’s profile as a blue chip stock by each criteria:
- Financial stability - Apple has been one of the fastest-growing companies in the world over the past two decades and as of FY 2022, had net earnings of more than $99.8 billion
- Market leadership - Between Q2 2021 and Q2 2023, Apple has accounted for between 14 and 23% of the global smartphone market
- Long track record - Founded in 1976, Apple has been a publicly traded company since 1980. Since its IPO, the stock has returned a whopping 127,170%
- Dividends - Apple paid it first dividend in 1987 and has since consistently managed to increase its payout year after year
- Lower volatility - Apple has a beta coefficient of 1.27 and while this figure is higher than the broader market, Apple is still a technology company and part of a sector that is characterized by very high volatility
- Liquidity - An average of 56 million AAPL shares are traded on the market every day, which gives the stock nearly unparalleled liquidity
Key Takeaways From What Does A Blue Chip Stock Mean
- Blue chip stocks are issued by large companies that are generally financially stable, have a significant market share and capitalization, and often pay dividends
- Blue chip stock is a colloquial term used by traders and investors to describe stocks of large companies
- Constituents of the S&P 500 are predominantly blue chip stocks, such as Apple inc
- Not every blue chip stock may pay dividends, or experience very low volatility, but a majority of blue chip stocks fall under these categories
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