It was a regular day in 1923 when Oliver Gingold, an employee of Dow Jones, noticed that multiple stocks were trading at $200 or more. He termed them “Blue Chip Stocks”. Since then, stocks of large corporations have come under the blue-chip stocks.
If you are an investor interested in equity investments offering low risks, blue chip may be a good option for you.
Read further to understand how a stock qualifies as a blue chip and what factors to consider before investing in these stocks.
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What are blue chip stocks?
Blue chip stocks are equity stocks of giant, well-performing corporations with financial stability and consistent financial performance. Blue chip stocks include businesses with large market capitalisation.
Market capitalisation is the total market value of all outstanding shares. A market capitalisation of ₹20,000 crore or more is necessary for companies to fall under this category.
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Features of blue chip stocks
- The primary feature of a blue chip company is its goodwill and creditworthiness. Blue chip companies are the ones that have been in the business for a long time, and they are seen as market leaders in the industry. This makes blue chip shares creditworthy.
- Since these companies are financially strong and stable, the returns on these investments are assured. The risk of payment default is rare.
- Share prices of blue chip companies do not fluctuate much. Hence, these stocks are less volatile to market conditions.
- Since price fluctuations are low, trading these stocks in the short term may not be very profitable. These investments are for the long-term to generate stable income.
- Blue chip stocks are highly liquid. They can be traded easily in the secondary market, considering the goodwill and reputation of blue chip companies.
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The rationale behind blue chip investments
There are various reasons for investors to invest in blue chip stocks:
- Blue chip stocks offer higher returns than regular stocks. Since these companies perform well, their profit margins are higher which in turn helps in giving higher dividends to its investors.
- These investments are secured as the companies have been in business for very long, withstanding all economic adversities.
- Investing in blue chip stocks helps in diversifying the portfolio as they mitigate the risk of loss from other investments.
- Blue chip stocks do not have extreme reactions to economic conditions like recession. Hence, blue chip companies’ share prices are less volatile making these investments safe.
- These stocks are easily tradable in the secondary market.
Risks or disadvantages of blue chip stocks
While blue chip stocks have low risks, they are not risk-free. Some of the common risks or limitations are below:
- The investment in blue chip stocks is expensive. Since these are top companies with powerful performances and financial abilities, their share prices in the market are high.
- These companies have a slower growth rate as they have already reached their peak. Generally, they continue to grow at a diminishing rate.
- Since these companies have been in the industry for long, the management with experienced employees may be resistant to economic changes. Hence, they may not be able to adapt instantly to new technologies and changes in the industry.
Top blue chip stocks in India
Business – Textiles, natural gas, telecommunication, mass media, retail, etc.
Share price – ₹2,529.40 (As of 20 Dec, 2023)
Market cap – ₹17.11 trillion
Business – IT and consulting business in the IT and consulting
Share price – ₹3,774 (As of 20 Dec, 2023)
Market cap – ₹13.68 trillion
Business – Consumer goods like food, beverages, personal care products, etc.
Share price – ₹2,554 (As of 20 Dec, 2023)
Market cap – ₹6.01 trillion
Business – Food products, beverages and confectionery.
Share price – ₹25,128 (As of 20 Dec, 2023)
Market cap – ₹2.42 trillion
Business – Banking
Share price – ₹1,644.75 (As of 20 Dec, 2023)
Market capitalisation – ₹12.57 trillion
Bottomline
We now have clarity on the concept of blue chip stocks and their role in mitigating risks.
However, the blue-chip stock prices being more expensive than regular shares, make it difficult for small investors to buy them in large quantities.
Though they have a component of risk, they are safer in comparison to other investments. Hence, an ideal portfolio should try to include some quantities of blue chip stocks, too.
FAQs
Market capitalisation is the first criterion when looking for a blue-chip stock. Look for the top-ranking stocks by market cap and choose the ones that seem suitable upon considering other factors like financials, historical trends, current share price and more.
The term blue-chip for stocks was given by Oliver Gingold, using poker as the reference. According to the game of poker, blue chips have the highest value. Since we are talking about high-value stocks, the same term was adopted.
Growth stocks are stocks of companies whose revenues are on the rise. These companies reinvest their profits in the business and refrain from paying dividends. Investors invest in it with the hope of capital appreciation. Blue-chip stocks generally do not come under growth stocks since they are more stable and not rapid in growth.
Funds created for the purpose of investing in large-cap stocks are called mutual funds. It is an equity scheme with low risk and stable returns. These funds are suitable for investors looking for a long-term source of regular income.
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