A sure thing is difficult to find in the stock market, but a blue-chip stock might be as close to that as it gets. If you're looking for an investment that offers growth potential with relatively low risk, blue chips can be a good place to start.
A blue chip is a large, financially sound company that has proved it can weather downturns in the market. These well-established companies have long track records of positive earnings and have paid dividends in both good times and bad. There are no definitive criteria for determining whether a stock is a blue chip, though, so it can be open to interpretation. The most recognised list of blue chips is the components of the Dow Jones Industrial Average.
The name "blue chip" comes from the game of poker; the blue chips have the highest value.
Dow Jones Industrial Average
Established by journalist Charles Dow in 1896, the Dow Jones Industrial Average (DJIA) is composed of 30 blue-chip stocks from every important sector of the stock market except utilities and transportation. The average was created to help analyse the market by tracking the stocks of the biggest and most influential companies. It's the world's oldest stock index and a leading indicator of the stock market's performance.
The blue chips featured in the Dow are as follows: 3M Company; Alcoa Inc.; American Express; AT&T; Bank of America; Boeing Co.; Caterpillar Inc.; Chevron Corp.; Cisco Systems Inc.; Coca-Cola Co.; Du Pont; Exxon Mobil Corp.; General Electric Co.; Hewlett-Packard Co.; Home Depot Inc.; IBM; Intel Corp.; Johnson & Johnson; JP Morgan Chase & Co.; Kraft Foods Inc.; McDonald's Corp.; Merck & Co.; Microsoft Corp.; Pfizer Inc.; Proctor & Gamble Co.; Travelers Cos.; United Technologies Corp.; Verizon Communications Inc.; Wal-Mart Stores Inc.; and Walt Disney Co.
Because of their solid financial standing and well-established positions in their respective industries, it's no surprise that blue-chip stocks typically perform well. John Campbell of the investment bank Goldman Sachs followed 20 to 25 blue-chip stocks from 1995 to 1998 and found that they returned 36.42 per cent annually, compared with the S&P 500's 30.2 per cent.
If you want to take advantage of this type of performance without having to select individual stocks, several investment firms have mutual funds comprised only of blue chips.
The advantages of owning blue-chip stocks are fairly obvious: a track record of above-average rates of return and relatively low risk. Also, there's no shortage of information about these companies in print and online. They're well known and thoroughly analysed, which makes it easy for the novice or casual investor to follow them.
On the downside, there's usually a price to pay for quality and value, and such is the case with blue-chip stocks. The stock prices of these companies typically are higher than those of other companies. Also, while blue-chip stocks are seen as safer investments than many other stocks, you're still taking a risk with your money. Like any other stock, a blue-chip stock can lose value, and the more heavily you're invested in it, the more money you can lose.
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