What is a blue chip company?

Answer 1

They sell these blue chips

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Answer 2

Those are traditionally the strongest companies on the New York Stock Exchange. General Electric, Proctor and Gamble, etc. Their stocks don't fluctuate much, but usually pay relatively good dividends

Answer 3

The Benefits of Owning Blue Chip Stocks
From Joshua Kennon,

Investing in Sound, Predictable and Long-Established Companies
Despite their reputation as boring, stogy and perhaps even a little outdated, blue chip stocks have long reigned supreme in the portfolio of retirees, non-profit foundations and conservative individuals. These companies often reside at the core of American business and boast pasts as colorful as any novel (the phrase blue chip, for example, comes from poker where the highest and most valuable playing chip is - you guessed it - blue). Yet the prosaic-ness attributed to them is certainly not deserved; there is nothing more exciting than making a profit and that is certainly what blue chips are all about.

The definition of a blue chip stock

The exact criteria used to classify a company’s stock as a blue chip is relatively subjective.

The title rests upon numerous ambiguities (perhaps Supreme Court Justice Potter Stewart’s famous definition applies to blue chip stocks as well as obscenity, “I can’t explain it but I know it when I see it”). Most professional investors agree that blue chips share several important characteristics including:

An established record of stable earning power over several decades
An equally long record of uninterrupted dividend payments to common stock holders
A history of regular increases in the dividends payable to each share
Strong balance sheets with a moderate debt burden
High credit ratings in the bond and commercial paper markets
Large size relative to American businesses as a whole in terms of revenue and market capitalization
Diversified product lines (e.g., General Electric) and / or geographic location (e.g., Coca-Cola).
A competitive advantage in the market place due to cost efficiencies, franchise value or distribution control

The Dow Jones Industrial Average

These characteristics usually help blue chip companies maintain their leading industry positions. The moderate debt levels and excellent credit ratings allow them to borrow money at a lower cost than their competitors. Excellent market place reputation also results in higher sales; a consumer is more likely to purchase a brand with which he is familiar despite a slightly higher price tag.
Perhaps the most famous list of blue chip companies in the world is the Dow Jones Industrial Average. This collection of thirty stocks is selected by the editors of the Wall Street Journal. The only requirement for inclusion in the index is industrial leadership. Despite this seemingly low-hurdle, each potential Dow component undergoes incredibly scrutiny, resulting in a list that stands as the most prestigious roster of blue chips in the world. The individual companies that make up the index are rarely changed; considering the inherent stability of blue chip stocks, this should come as little surprise.


Investing in blue chip stocks

There are several ways to invest in blue chip stocks. An investor can acquire shares directly through a broker, a direct stock purchase plan or a dividend reinvestment plan. He can also purchase a mutual fund that specializes in blue chip stocks. Perhaps the most effective way for the average investor to invest is to begin a dollar cost averaging plan into diamonds. Diamonds are an investment instrument traded on the American Stock Exchange; buy purchasing one share of a diamond, an investor is indirectly purchasing a fraction of each of the thirty components in the Dow Jones Industrial Average. Diamonds are preferable over blue chip mutual funds because of their low expense ratio as well as tax efficiency; because they are traded on an exchange, the underlying shares are only sold to reflect a change in the companies making up the Dow, resulting in lower capital gains taxes