Smart position sizing & risk management

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Market Structure

Blue Chip

A large, well-established, financially stable company with a long track record. Examples include Apple, Microsoft, and Johnson & Johnson.

What is a Blue Chip Stock?

A blue chip stock is a share of a large, well-established company with a history of stable earnings, a strong balance sheet, and often a dividend. The term comes from poker, where blue chips are the most valuable. Think Apple, Microsoft, JPMorgan, Johnson & Johnson.

Characteristics

  • Large market cap: typically tens or hundreds of billions of dollars
  • Stable earnings: consistent revenue and profit over many years
  • Dividend payers: many blue chips pay and regularly increase their dividends
  • Index members: most blue chips are in the S&P 500 and/or the Dow Jones
  • Lower volatility: they move less on a percentage basis than small-cap or speculative stocks

Blue chips vs penny stocks

  • Blue chips: lower risk, lower volatility, more predictable. Good for swing trades and position trades
  • Penny stocks: high risk, extreme volatility, often manipulated. Can produce massive gains or total losses in a single day
  • Liquidity: blue chips have extremely tight spreads and deep order books. Penny stocks can have wide spreads and thin volume that makes getting in and out difficult
New traders are often drawn to penny stocks because the share price is low. Experienced traders prefer blue chips because the liquidity is deep, the spreads are tight, and the price action is cleaner.

Related Terms

Dow Jones Industrial Average

An index of 30 large blue-chip US companies. The oldest and most widely quoted market index, though many traders consider the S&P 500 more representative.

Small Cap / Mid Cap / Large Cap

Size classifications for companies based on total market value. Small cap is under $2 billion, mid cap is $2-10 billion, large cap is over $10 billion.