What are blue-chip companies stocks? Things to consider before investing in blue-chip companies stocks
Blue Chip stocks are considered the best way for “safer investment instruments” in the equity market. Do you think blue chip stocks are the right investment option for you?
Please continue reading to learn more about blue chip stocks and their fit in your portfolio.
- What are bluechip stocks?
- How to identify bluechip companies stocks stock?
What are bluechip stocks?
Blue chip stocks are shares of a huge company with excellent goodwill and prestige. These companies have a large market capitalization and are well-established, known, and financially sound companies that have been operating for many years.
Blue-Chip companies in India have a market capitalization greater than Rs. 50,000cr. These companies have a record of increasing their topline consistently and improving their operating margins on an upward trajectory.
Why are they called blue chips? The name blue chip is used in the game of poker, which are the highest value pieces. This symbolizes that blue chip companies are well known and of the highest value in the equity market.
Features of bluechip companies stocks
- Large market capitalization: These stocks trade at a higher price in the markets. Therefore, they form a massive part of the market and hold significant market capitalization.
- Stable returns: blue chip stocks have very high reliability regarding stable returns. They may not generate greater returns like mid-cap or small-cap stocks but provide steady growth to the investments.
- Regular Dividend: Dividends are regular payments that investors receive from a company’s revenue. These regular payments can be made by companies that have already grown and matured and do not need to reinvest much into their growth strategies. Dividend payouts do not describe a blue-chip fund. But it is an important characteristic that attracts many investors to these stocks.
- Part of the market index: blue chip stocks form a significant part of an extensive market index like the Nifty 50.
- Low risk: These investments are considered safe as the companies are financially sound and have stable performance.
Reasons to invest in bluechip companies stocks
- Diversification: A portfolio should not be concentrated in any particular sector; it should have proper diversification. While investing in stocks like a small cap or mid cap that generate tremendous or abnormal gains, blue chip stocks reduce the overall portfolio volatility and standard deviation, which further helps optimum diversification.
- Stable income: No matter the market conditions, blue-chip companies pay regular dividends to their shareholders, which is why it is considered a great investment option for passive income.
- Best for long-term investments: blue-chip stocks are meant for investors with a long-term investment perspective. This is mainly because these stocks undergo slow but steady growth over time. Usually, investors add blue chip stocks to their portfolio for retirement purposes as the growth is guaranteed but slow.
- Management: Management is the backbone for the growth of any company. The board of management of blue-chip companies comprises industry leaders with significant experience and is considered an expert in their respective industries.
- Least effort: blue chip stocks do not experience volatility or fluctuations, unlike other stocks. Therefore, due to the volatile market movements, you don’t have to actively manage or track your blue-chip stock investments.
Additional read: What are International funds?
Things to consider before investing in bluechip companies stocks
- Expensive: Blue-chip stocks trade at very high price levels in the market. They are already well-established stocks. It is challenging to find a blue-chip stock with a low P/E ratio. This can be expensive to invest in for small investors.
- Low returns: Blue-chip companies have been operating for an extended period of time. They have reached their maximum growth potential. They do not have exponential growth in their share price in the short-term horizon.
- Slow Growth: Blue-chip stocks do not grow as fast as small-cap or mid-cap stocks. Sometimes, they even generate returns less compared to the benchmark. Due to this, investors need more patience and a longer time horizon while investing in blue-chip stocks.
List of top bluechip companies stocks
Some trendy names of blue-chip companies present in every household in India are: –
- Reliance Industries Ltd.
- Tata Consultancy Services Ltd.
- Avenue Supermarts Ltd. (DMart)
- Hindustan Unilever Ltd.
- Asian Paints Ltd.
- Nestle India Ltd.
Additional read: What are offshore funds?
How to identify bluechip companies stocks stock?
There are some parameters that help you identify blue-chip companies. You’ll have to check –
- The price-to-earnings ratio (PE) and market capitalization
- If, over a period of time, a company has consistent annual revenue
- If the debt-to-equity ratio of a company is stable with a sustainable interest coverage ratio, return on equity (RoE), and superior cash flows.
- If the company has a clear vision for the future and a consistent growth trajectory
- If the company has a significant competitive advantage over its contemporaries
- If the company has the potential to outperform the competitors in their markets
- If the company has good corporate governance and management setup.
Who should invest in blue chip companies stocks?
Blue chip stocks are the best learning way for beginners to start their investment journey. This is the best investment option for investors who do not want to take risky bets but still want their investments to generate good returns.
The ideal time horizon to invest in blue-chip stocks is 5-7 years to see the investment grow. This investment is best for investors wanting a passive investment option with limited risk exposure.
When building a portfolio, investing in stocks takes time and research. A cheaper alternative to this is an Index Fund.
An Index fund is a basket of securities containing all the stocks in the Index in the same proportion as the Index. It helps you invest in a bunch of securities at once without direct exposure to it.
This also saves time and offers optimal diversification to the entire portfolio.
Consult an expert advisor to get the right plan
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