What Are Blue Chip Stocks?

Blue Chip stock companies are generally market leaders with high goodwill and providing well-known services or products. These are well-established companies, which have been operating for many years, and are known for stability and quality, often paying returns to their investors.

Several blue-chip stocks are household names such as Reliance, Infosys, TCS etc.

What does “Blue Chip” mean?

The term blue chip originated from poker.

Blue chips were the highest value when placing a wager. Hence blue-chip stocks are the most valuable part of any long-term investment portfolio and passed on to generations to come.

The term “blue chip” was first used to describe high-priced stocks in 1923 when Oliver Gingold, an employee at Dow Jones, observed certain stocks trading at $200 or more per share.

How to find Blue Chip stocks?

Key characteristics that can help one to identify blue-chip stocks are

• Large companies with an excellent reputation and competitive advantage
• Having little to no debt, or significant cash reserves
• Regular dividend growth year after year
• Market Leaders in their segments
• Stable Growth
• Operate profitably including in adverse economic conditions
• Part of Benchmark Indices like Nifty 50, Sensex, etc
• Credit Worthiness or Ratings

 Who should invest in Blue Chip stocks?

The blue-chip stocks are an expensive but relatively safer investment. And make an important part of a diversified portfolio that includes lower risk investments.

Typically following types of investors tend to invest in Blue Chip stocks:

• New
• Conservative
• Nearing Retirement
• Long term investors

To invest in Blue chip stocks, an investor needs to have a Demat account. Investment can be done directly by investor online through your broker.

The investor needs to identify the stocks to buy, and would also need to know when these stocks need to be sold. This process of identification of stock to buy, buying, and then selling the stock is not easy and needs adequate knowledge about the market, company’s performance, macroeconomic trends, and time to spend on researching stocks.

Mutual Funds focusing on Blue Chip stocks

Mutual Funds are a good way to invest in Blue Chip stocks especially for investors who are

• • Interested in long term returns along
  • Have moderate risk-taking ability
  • And a limited time to actively monitor the performance of their portfolios

 By investing in Mutual Funds focused on Blue Chip stocks, such investors enjoy consistent returns over a long period of time. Investors can invest in blue-chip mutual funds in two ways

• Online
  • Through online platforms like Paisabazaar.com
  • Or, directly through the websites of the Asset Management Companies (AMCs), offering fund.

• Offline – this traditional method, needs an investor to fill in a form, and submit it to the fund branch or, invest through a broker

Check out our course on How to Select Best Mutual Funds

 Limitations

Some of the limitations of investing in Blue Chip stocks include

• Slow and steady portfolio growth/returns as compared to small/midcap stocks, which sometimes offer faster growth but come with inherent risks.
• High value of stocks requiring higher capital
• Focus over dividends than stock price growth
• Potential downside risk due to complete tracking by analysts, and reports published publicly
• Low volatility providing limited opportunities for profits in day to day trading

• Conclusion

To summarise:

• Blue-chip stocks are companies with a strong balance sheet, stable cash flow and robust financial performance, least affected with economic downturn.
• Blue chip stock companies are mostly part of benchmark indices such as Nifty 50, Sensex etc.
• These stocks are expensive but offer steady returns in the long run
• Offer stability, safety and quality
• Investors who are new, conservative, towards retirement or interested in long term returns can consider investing in blue-chip stocks
• The flip side of investing in blue-chip stocks are investments in slow growth, expensive stocks with possibly low returns