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What are Blue Chip Shares?

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  • Written By: K. Kinsella
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 03 November 2016
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Blue chip shares are stocks issued by stable and well established companies that trade on major international stock exchanges. These companies often comprise the major stock indexes, such as the Dow Jones Industrial Average (DJIA) in the United States, and the Financial Times Stock Exchange 100 Index (FTSE 100) in the United Kingdom. Definitions of blue chip companies are not precise because ailing firms may lose blue chip status over time, and smaller companies may become robust enough to become known as blue chips. Blue chip shares are particularly attractive to investors because the major companies tend to be more stable than smaller firms, and consequently the share prices of blue chips tend to remain relatively stable.

Shares or stocks represent partial ownership in a company. The prices of blue chip shares are contingent upon the financial strength of the company that the shares are tied to, as well as supply and demand. When one sector of the economy experiences contraction, shares of companies in that sector usually lose value because investors are less inclined to buy stock.

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Individual and institutional investors can buy blue chip shares through brokerage firms that trade on the New York Stock Exchange (NYSE) or other major international markets. Full service brokerage firms charge a trade fee for the purchase and sale of shares. Discount brokerage firms and online broker's charge smaller fees but do not provide investment advice to shareholders. Many blue chip shares pay dividends, and as a result conservative investors often buy the shares with retirement funds in order to create supplemental income.

Investors can buy blue chip shares indirectly by purchasing mutual funds that primarily invest in blue chip companies. Some mutual funds are designed to track the performance of the major stock indexes, and funds achieve this by buying the same shares that are listed on that performance index. Funds described as "large cap" usually contain a high percentage of stocks in blue chip companies. Legally, mutual funds have to disburse dividends paid on the underlying stocks, and shareholders receive these fund disbursements in December.

Major companies are historically less likely to file bankruptcy than less established companies, known as small cap companies. Small cap stocks have more growth potential than blue chip stocks because, in many cases, blue chip firms are so dominant in a particular sector of the economy that the company has very little room to grow. Investors assume a degree of risk when they by stocks because all firms, including blue chip companies, can become insolvent. Shareholders usually lose the entire amount of their investment when a company files bankruptcy.

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