Understanding Blue Chip Stocks: Definition, Examples, and Investment Strategies

Blue chip stocks are big companies, organizations, or businesses that have a great reputation. These are usually large, reputable, financially sound businesses or companies that have been in business for many years and have reliable earnings that often pay dividends to investors. 

A blue-chip stock typically has a multi-billion dollar market cap, is often a market leader, or comes among the companies or businesses that come under the top three or four lists in its field or sector.

For this reason, blue chip stocks come among the list of most popular for purchasing among investors. Some of the best examples of blue chip stocks are Coca-Cola Co., IBM Corporation, and Boeing Corporation.

Wealthy investors turn to blue chip stocks because blue chip stocks have the capability of financial capability, and these stocks often pay dividends to their investors.

Investors are aware that blue chips can overcome all kinds of market challenges; while this may largely be true, it cannot fully guarantee it. This is the reason that it is important to diversify an investor’s stock market portfolio beyond blue chip stocks.

Understanding the Concept Of Blue Chip Stock

While payments of dividends are not necessarily considered blue-chip stocks, most blue-chip stocks have a history of paying steady or gradually increasing dividends over a long period of time. The term is said to be derived from poker, where the blue chip is the most expensive chip.

Blue chip stocks are often one of the most esteemed indexes or averages in the market; such example is the Dow Jones Industrial Average, the Nasdaq-100 in the USA, the Standard & Poor’s (S&P) 500, the TSX-60 in Canada or FTSE index in the UK.

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The generally globally accepted benchmark is a market cap of five billion dollars, although market or industry leaders can be businesses or companies of all sizes. T. Rowe Price’s Blue Chip Growth Fund has no specific guidance on qualifying companies other than focusing on established mid and large-cap companies or businesses in their industries, despite market capitalizations. Historically, the average fund holding is about a hundred billion dollars.

What Makes A Stock, A Blue Chip Stock?

Think of a blue chip stock as a stock like the one you’d bring home for meeting your parents: it’s impressive and has supportive content. It is stable, responsible, and reliable.

Blue chip companies or businesses have a proven strong track record in both good times and bad times. Stocks in the market that are considered blue chip stocks typically have the following things common in them:

1. Large Capitalization Of The Market:

Market capitalization can be defined as a measure of the value and size of a business or a company. Blue chip stocks are typically a type of large capital stock, which usually points out that they have a market value of more than ten billion dollars.

2. History Of Its Growth:

Blue Chip has a reliable and solid track record of sustainable growth and better prospects for the future. They may not be as flashy as fast-growing stocks in the technological field, but the reason behind this is that they are already established well in the stock market for investors or traders.

3. Component Of A Market Index:

Blue chip stocks are found in major stock indexes such as the Dow Jones Industrial Average, Nifty 50, S&P 500, S&P 100, and/or Nasdaq 100.

4. Dividends:

Not all blue-chip stocks in the stock market pay dividends, but almost many blue-chip stocks pay dividends. Dividends are regular or fixed basis payments made to investors in that stocks from a company’s or business’s earnings. Dividend-paying companies or businesses are often mature, pointing out that they may no longer need to invest much of their earnings or income into growth again. 

Why Must Investors Invest In Blue Chip Stocks?

No single stock makes up the bulk of the portfolio of a stock investor in the stock market. Diversification, at all times, is essential when investing in stocks in the stock market, even if you are investing in companies or businesses that are considered solid. Diversification requires allocating investors’ money across multiple types of businesses. 

This points out that including small, medium, and large market capitalization companies or businesses, as well as businesses or companies from different industries and geographies. However, due to their reliability, blue chips are popular in the midst of investors in the stock market, especially those who are older or more risk-averse. 

Investors and traders who invest and trade in the stock market also appreciate the dividends that blue-chip stocks typically pay them from time to time. Dividends are, to a great degree, attractive if the investors invest for income or profits, as many retired investors do in the market. Blue chip stocks tend to pay reliable and growing dividends, especially for investors planning their retirement.

Features Of Blue Chip Stocks In the Stock Market

They are mentioned in the points below:

1. Assured Returns: Blue chip stocks bring quarterly returns as dividends to their investors in the stock market. Having well-established companies or businesses is also a safe investment path for most investors who tend to invest in the stocks in the stock market. This security comes with the guarantee of regular but guaranteed returns from the stocks invested in the stock market.

2. Credit Worthiness: Blue chip companies or businesses have enough capital to meet their debts and financial obligations easily. Hence, this makes the shares issued in the stock market by these companies or businesses highly reliable.

3. Risk Factor: Since large companies or businesses which have performance and growth stable issue these stocks (blue-chip stocks) in the stock market, the risk factor that is associated with blue-chip stocks in the stock market is relatively less compared to other types of stocks issued in the stock market. 

Stock market investors can, to a greater extent, reduce the risk of the burden associated with blue-chip stocks by diversifying their stock portfolio of the investors in the market.

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4. Investment Horizon: The investment term is usually more than seven years. These extended periods make the blue-chip stocks of blue-chip companies well-suited for achieving their long-term financial goals because they invest over long periods of time.

5. Growth Prospect: Blue chip companies or businesses are the big ones that have reached their potential of growth to their maximum height and can move higher in the upcoming time. This affects Blue-chip stocks in India, which have been rising gradually but steadily.

6. Taxation: Income from blue chip stocks in India is considered income under Section 80 C of the Indian Constitution of the Income Tax Act. Short-term capital gains are taxable at fifteen percent. Despite that, long-term capital gains or profits in excess of Rupees 1 Lakh are taxable at ten percent.

Reasons For Investing In Blue Chip Stocks

Blue-chip stocks of companies or businesses in India are seen as an attractive investment option and opportunity for achieving long-term financial-based goals. Below we have given some most common reasons for investors investing in Blue-chip stocks –

1. Blue-chip usually offers higher returns or profits to their investors in the stock market that are being paid to these investors quarterly.

2. Blue-chip stocks in the stock market also facilitate the building of corpus.

3. These stocks also facilitate or offer diversification of the stock portfolio of their investors in the stock market.

4. Blue-chip stocks help cushion the impact of inflation, economic stagnation, and recession.

Despite these, due to their higher prices, blue chip stocks in the market may not be suitable for investors in the market who have smaller incomes for investing in the stock market.

Advantages For The Investors Investing In Blue Chips Stocks In The Stock Market

The solid financial position, creditworthiness, and excellent stock market valuation of blue-chip stocks in the stock market benefit their investors and give them many various advantages for their investment in their shares or stocks.

Blue chip equity investors will enjoy the following various benefits after investing in these stocks in the stock market: 

1. Regular And Stable Dividends: Regardless of the market conditions of the stocks, blue-chip equity investors enjoy consistent returns or profits on their investments in these stocks in the market. These returns or profits are yielded through dividends that are paid to their investors every quarter.

2. Opportunity For Achieving Financial Goals: Being an investment option or opportunity for the long term that comes with a term for the investment of more than seven years; this gives investors investing in blue-chip stocks enough time to build a healthy working body over many years for their goals from respective financial perspectives.

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3. Benefit Of Diversification Of Stock Portfolio Of The Investor: Blue chip stock or securities of companies or businesses are leading business organizations that do not generate revenue or profits from a single channel of income. 

This allows the investors to cover losses against their operational failures and allows their investors to spread the risks that are associated with blue chip stocks in the stock market.

4. Liquidity: Blue chip companies or businesses benefit from the goodwill of the market and high levels of credibility. It instantly improves the market worth of blue-chip companies or businesses. It presents them as an appealing opportunity for investment for investors investing in it in the stock market. 

This directly facilitates buying and selling of these stocks, making them highly liquid.

Disadvantages For The Investors Investing In Blue Chips Stocks In The Stock Market

Everything has its advantages and drawbacks. So, investing in blue-chip stocks has its own drawbacks. These drawbacks of investing in blue chip stocks are mentioned below in points:

1. Possibility Of Returns On The Low Side: Although blue chips often provide reliable returns or profits, this should not be confused or taken with high profits or returns from the stocks. When the thing comes to investing in the stock market, reliability comes at a cost. So if you think of investing in blue chips, don’t start expecting huge, enticing returns or profits.

2. They Are Usually Expensive: If an investor wants to add a large, reputable company to their stock portfolio, it will cost them dearly. Blue-chip stocks are in high demand in the market and, therefore, more expensive to purchase than small businesses or companies. No big deal, but yes, something to ponder over.

3. They Are Not Fully Risk-Free: That’s true that blue chip stocks are less volatile than other stocks that are issued in the stock market and have a lower liquidation risk factor than fully established businesses or companies.

Although, if an investor is buying blue chip stocks, they should not fall into the trap of complacency. “Low” risk doesn’t necessarily indicate “no” risk, and blue chip stocks can, many a time, get into large crises.

No company or business is “too big to fail”; just ask former Lehman and Enron Brothers executives!

Alternative Investment Options For Blue Chip Stocks

Due to their goodwill and reputation in the market, these stocks in India have a low-risk factor. The low-risk load also makes these stocks suitable for cautious and risk-averse investors in the market.

Despite that, investors in the stock market who want higher returns or profits with limited market risk can opt for alternative investment portions mentioned in the points below.

1. Real Estate:

Although the rate of growth of the real estate businesses in the market in India has slowed down a bit for some time, it has the scope and potential of becoming and giving one of the most profitable investments than other investments in the market. Investors can buy, sell or rent commercial and residential properties and generate income or revenue in a timely manner.

2. Exchange-Traded Funds (ETFs):

They are a collection of securities or stocks traded on an exchange like a stock market and are considered one of the investment options that are low-risk. 

Exchange-Traded Funds (ETFs) typically include bonds, stocks, commodities, and other various investment instruments and have low expense ratios and lower associated fees. Investors can invest in gold ETF, liquid ETF, international ETF, or bank ETF depending on their needs. 

3. Fixed Deposits:

Investors in the stock market who are looking to generate profits or income and benefit from the tax can try investing in fixed deposit systems instead of investing in these stocks.

Investors can deposit their money into long-term and short-term fixed deposits depending on demand. Fixed Deposits (FDs) also allow investors to benefit from an emergency loan.

4. Government Bonds:

Government bonds come under the category of investment options with low-risk factors. Issued by the Indian government and supervised by the Reserve Bank of India (RBI). These bonds offer their investors a fixed interest rate and allow them to diversify their stock portfolios in the market. In addition, government bonds extend tax benefits to investors investing in them and provide liquidity.

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These stocks in India are an attractive option or opportunity. For those looking forward to generating steady returns, income, or profits over a long period of time. Although, investors in the stock market can always explore other available investment options or opportunities. And improve the profitability of their stock portfolios.

List Of Top Blue Chip Companies In India

The list of top blue-chip companies in the world, not just India, is decided by the company or business’s financial health and stability, market conditions, diversification, potential for growth earning, past performance, leadership and management, dividend yield, valuation, etc.

Below, we have delivered the top checklist of these stocks advantageous in India.

1. Tata Consultancy Services: Tata Consultancy Services works in the information technology field.

2. Reliance Industries: Reliance Industries works as a multinational conglomerate.

3. HDFC Bank: HDFC Bank, this is easy; it is growing in its banking field.

4. Hindustan Unilever Ltd.: It comes under the FMCG industry.

5. Infosys: Infosys also works in the field of information technology.

6. ITC Limited: ITC Limited comes under the paint industry.

7. Asian Paints: Asian Paints also comes under the industry of paint, as its name suggests.

8. Nestle India Ltd: It comes under the industry of FMCG. 

Safety Of Blue Chip Stocks In The Stock Market 

While a leading company or business with a blue chip stock in the stock market has weathered many market cycles and challenges. Leading to it being considered a safe investment option, this is not always the case in the market. 

The failures of Lehman Brothers and General Motors, as well as some of Europe’s major banks during the 2008 global recession, are proof that even the best companies or businesses can struggle in times of stress.

Blue Chip Stocks As Being A Part Of a Larger Stock Portfolio

While these stocks in the market are suitable for use as core stocks in a larger stock portfolio of an investor in the stock market, they generally shouldn’t make up an entire portfolio of stocks. 

A portfolio that is diversified usually contains a portion of cash and bonds. As part of their portfolio allocation to stocks, investors should also consider holding small and mid-cap stocks. 

Younger investors or investors who are beginners or intermediate in investing in the stock market can often take the risk. Of having a larger percentage of their portfolio in stocks, which can include these stocks. While older investors, professionals, or investors reaching their retirement stage can choose to focus. More on preserving capital through larger investments in cash and bonds.

FAQs

What Makes A Business, A Blue Chip?

These stocks are giants in their fields – industry-shaping companies or businesses are well-known, well-capitalized long-term stable players with strong prospects of financials.

What Companies Or Businesses Are Considered As Blue Chips?

Many of the biggest companies or businesses in the S&P 500 or Dow 30, such as JPMorgan Chase, Walmart, and IBM.

How Do Blue Chip Stocks Work In The Market?

These stocks in the market are the shares or stocks of very large companies or businesses known for their long track record of financial performance and profitability. These stocks are distinguished by their ability to withstand tough market conditions while delivering high returns or profits favorable to the current market conditions.

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How To Find A Blue Chip Stock?

The investor can purchase these stocks in the market using their Trading and Demat accounts. Or invest in exchange-traded funds (ETFs) and multiple mutual funds (MFs). That trace the blue-chip stocks that the investor wants to buy.

Where Does This ‘Blue Chip’ Term Come From?

The “blue chip” stocks term comes from the poker world. Where the chips used in gambling are various colors for representing different amounts of money. Blue chips are usually the most valuable of all the chips, surpassing red chips and white chips.

Are Blue-Chip Stocks Good Option For Investment In The Market?

A stock portfolio that is diversified in the stock market can include ownership of a wide range of these stocks. For example, stocks of large, well-capitalized, and well-understood businesses or companies, among many others. Besides this, for possessing individual shares in the market. Investors can even strive to gain high exposure by purchasing Exchange-Traded Funds (ETFs) or mutual funds.

How Do The Investors In The Stock Market Invest In Blue Chip Stocks?

Market participants can purchase these stocks individually or through an exchange-traded fund (ETF) or a mutual fund that invests in blue-chip stocks. In a few cases, ETFs and funds hold various asset classes and stocks, which include blue-chip stocks. In some other cases, ETFs or funds may focus solely on blue chips. For example, the Dow Jones Industrial Average is tracked by an ETF, including the thirty biggest of these stocks.