The definition of a blue chip stock
The exact definition of a blue chip stock is hard to tie down to definitive criteria. Potter Stuart, a Supreme Court Justice states “I can’t explain it, but I know it when I see it” on the matter of blue chip stocks. It is generally agreed by professional investors that a blue chip stock must have some important characteristics, such as:
- Good credit ratings. This includes the bond markets as well as the commercial paper markets.
- In terms of profit, the stock must have a large size (relative to American businesses).
- Diversity in terms of location or the actual product lines.
- A moderate to low debt along with healthy balance sheets.
- A history of consistant and strong earnings over a few decades, as well as a record just as long in constant surplus payments to stockholders.
- Regular increases in payable dividends.
- An advantage in the market that makes the whole thing work. This can be down to costing, value or distribution.
The Dow Jones Industrial Average
Low debt levels and healthy credit ratings are two highly important factors in the success of blue chip companies. They help them to attain loans at a much lower cost than their rivals, helping them to retain their leading positions in industry standings. Reputation also has a huge impact on this. People are more likely to purchase from a well-known brand, even if they have to pay a little more for the pleasure.
The Dow Jones Industrial Average is possibly the most renowned collection of blue chip companies in existence. The list is comprised of thirty stocks that are carefully selected by editors of the Wall Street Journal. A strong leadership position in the industry is the only characteristic needed for consideration to acquire a place in the list. This may sound easy enough for some companies, but the incredible levels of inquiry that companies must undergo is perplexing. This, combined with the stability of the companies in it mean the list rarely changes, but it is famous for including the best of the best.
Investing in blue chip stocks
To invest in blue chip stocks there are several methods to choose from. You can attain shares through a broker or stock purchase/ dividend reinvestment plan. Mutual funds that deal directly in blue chip stocks can also be purchased. If the average investor is looking for the best way into the blue chip stock market however, diamonds are the answer. They are used as an investment instrument and are traded on the American Stock Exchange. This means a purchase into diamond shares means you are buying into a small portion of each blue chip companies. These plans often have a lower ratio of expense and taxation.