What are Blue Chip Stocks?
Blue Chip Stocks are shares of Blue chip companies that are well established and mature companies. These companies have made their mark in their industry or sector. People often consider them as pillars of the industry.
The term blue chip comes from poker. In poker, the blue chips are the ones with the highest value on the table. Hence the same is adopted for the stock market. Like the blue poker chips, blue chips companies are also of high value. They are well-known, stable, profitable and well-capitalized companies. The investment in these companies is relatively safer than investment in mid and small cap companies.
The blue chip companies are also known as large cap companies. In India, large cap companies are those that rank between 1-100 in terms of market capitalization. These companies form a part of the stock index such as Nifty 50 and Sensex. Large cap companies have reached economies of scale, have stable growth rates and have the capacity to withstand market volatility better than non-blue chip firms. These companies usually have more than one line of business with multinational operations.
These companies are well-established. And their growth rate may not be as high as mid or small cap companies. Also, the returns from them may not be as high as mid or small cap companies. However, during market downturns, these companies are less affected than mid or small cap companies. Additionally, these firms pay dividends frequently.
The blue chip companies in India include Reliance Industries Pvt Ltd, TATA Consultancy Services Ltd, Hindustan Unilever Ltd, Infosys Ltd, Bharti Airtel Ltd, ITC Ltd, Asian Paints Ltd, Nestle India Ltd, HCL Technologies Ltd.
Explore: Best Blue Chip Funds
Features of Blue Chip Stocks
- Blue chip stocks are large cap companies with a well-established business operation, growth and history of consistent performance. These stocks have the history and potential to deliver consistent returns over the long term.
- Being financially resilient, blue chip companies have the potential to survive and thrive in the turbulent economy.
- Blue chip stocks are a better investment option for an investment horizon of minimum 7 years. These stocks have the capability to provide a better rate of return in the long term while avoiding short term volatility.
- Such blue chip companies generate revenue from more than one business vertical or sector. With such a diversification
Advantages of Investing in Blue Chip Stocks
By investing in blue chip stocks an investor invests in large cap companies that are well established and mature companies. Following are the advantages on investing in blue chip stocks:
- Consistent returns and solid financials: These companies have consistent earnings than other companies. They have a strong financial and reliable management team in place that strives to keep the company going.
- High liquidity: These companies are popular on the stock market and hence their trading happens in huge volumes in the market. One can easily buy and sell the shares of such companies. Thus they have very high liquidity.
- Dividends: Blue chips companies pay high dividends consistently to attract investors. Since these companies are large established companies, they often have very few new projects in hand that do not require the company to retain the profits. Hence shareholders get the majority of the profits in the form of dividends.
- Brand value: Blue chips companies have brands that cater to the daily needs of people. Hence these companies have a high brand value and strong competitive edge over emerging brands and companies.
- Diversification: These companies are quite stable. Hence these companies will ensure stability and diversification to an investor’s portfolio. Since these companies have robust financial health, the chances of their failure are minimum, decreasing the risk of investing in them.
- Better resistance to economic downturns: These companies are large, well-established and mature companies. They have a strong foundation and a well-connected network for production, sales and distribution. This increases the stability of the business. The effect of recession and stagnation on these companies is minimal. Their share prices have lower volatility when compared to emerging companies.
Frequently Asked Questions
Blue chip companies are well established and mature companies. These companies have made their mark in their industry or sector. People often consider them as pillars of the industry.
What are Blue Chip benefits?
Blue chip companies are well established and mature companies. Following are the benefits of Blue Chip companies:
– Consistent returns and solid financials,
– High liquidity,
– Brand value,
– Diversification and High resistance to economic downturns
Blue chip stocks are a better investment option for investors who wish to earn longer term capital appreciation over the investment horizon of more than 7 years. These stocks help build a corpus, earn periodic returns through dividends and achieve portfolio diversification.