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What is meant by blue chip companies?

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.

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 other name for blue chip companies is large cap companies. In India, large cap companies are those that rank between 1-100 in terms of market capitalization. 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.

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.

What are Blue Chip benefits?

Blue chip companies are well established and mature companies. Following are the benefits of these companies:

  • Consistent returns and solid financials
  • High liquidity
  • Dividends
  • Brand value
  • Diversification
  • High resistance to economic downturns

Consistent returns and solid financials

These companies have consistent earnings than other companies. They have a strong financials 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.

Published on October 27, 2020