What are blue chip shares?

‘Blue chip’ is a term used to describe the shares of a leading company which is known for its excellent management and strong financial structure. This term has become a generic one for a quality security.

They are usually high priced stocks because the public has confidence in the company’s long track record of steady earnings such as BHP Billiton (BHP) and Telstra (TLS).

These types of companies are also considered to be strong names in the industry and their products or services usually dominate their respective markets.

Blue chips are typically large international corporations that have been operating for many years and are considered to be quite stable.

Currently the top 10 shares by value on the ASX are:

Source: ASX as at 12 November 2014

The Standard and Poors (S&P) ASX 20 is also known as the blue chip index. This index tracks the performance of the 20 largest companies by market capitalisation listed on the Australian Stock Exchange (ASX).

This is checked by S&P Dow Jones on behalf of the ASX every three months to ensure that the top 20 companies listed on the S&P ASX 20 index are in fact the 20 largest by market capitalisation. If not the companies are switched around to reflect this.

All 20 companies also make up the S&P/ASX 200 which measures the performance of the largest 200 companies listed on the ASX by market value.

Examples of overseas listed blue chip shares are American Express, Microsoft, Adidas, Volkswagen, Honda, Royal Dutch Shell and Vodafone.

Investors can purchase blue chip shares directly using a broker or through exchange traded funds (ETFs) or unlisted managed funds.