Have you ever heard investors mention blue chip stocks and wondered what they are and why they are called that? Wonder no more! We’re here to explain blue chip stocks, the origin of their name, and their investment potential.
This article will provide a detailed discussion on blue chip stocks, helping you understand the blue chip stocks meaning and assess their viability as investments.
What Are Blue Chip Stocks?
Blue chip stocks are shares of well-known, established, and financially strong companies recognised for their consistent performance. These companies lead their industries and have a reputation for quality and reliability. The term ‘blue chip’ comes from poker, where blue chips are the most valuable.
A blue-chip stock typically comes from a company with a large market capitalisation, steady revenue and profit growth, a strong financial foundation, and a history of paying dividends. These stocks represent companies that have existed for many years and play a crucial role in national or international markets. They tend to be less volatile than the overall market, making them appealing to investors seeking safer investments.
Companies like Reliance Industries, Tata Consultancy Services, and HDFC Bank are considered blue chips in India. Their steady performance, regular earnings, and practice of paying dividends to shareholders define their blue-chip status. Investing in these firms means trusting your money with businesses that have proven their stability despite market fluctuations and are generally viewed as less risky.
Why Are They Called Blue Chip Stocks?
The term “blue chips” comes from poker, where blue chips are the highest value. In 1923, Oliver Gingold, a Dow Jones employee, noticed stocks trading at $200 or more per share and called them “blue chips,” comparing them to the valuable poker chips.
Since then, “blue chip stocks” has become a common term for high-value, stable, and reliable stocks. These stocks are highly regarded in the investment world, much like the prized blue chips in poker.
Features of Blue-chip Stocks
Blue chip stocks are shares of well-established, financially secure companies that offer reliable returns and lower risk. Here’s an overview of their key features:
Assured Returns
Blue chip shares provide regular returns through dividends, usually paid quarterly. Because these companies are well-established and financially secure, they offer a safe investment option for many investors, ensuring steady and reliable returns.
Creditworthiness
Blue-chip companies have ample capital to meet their financial obligations easily. This makes their stocks highly creditworthy, meaning they are seen as reliable and low-risk investments.
Risk Factor
These blue chip shares are issued by large, financially stable companies, so they come with lower risk. Investors can further minimise risk by diversifying their investment portfolio.
Investment Horizon
The investment period for blue chip shares are typically over 7 years. This long-term horizon makes them ideal for achieving long-term financial goals, as they grow steadily over time.
Growth Prospect
Blue-chip companies are large firms that have reached their peak growth. Consequently, their stocks grow slowly but consistently over time.
Taxation
In India, gains from blue chip stocks are considered income under Section 80C of the Income Tax Act. Short-term capital gains are taxed at 20%, while long-term capital gains over Rs. 1 lakh are taxed at 12.5%.
Do Blue Chips Stocks Make Good Investments?
Blue chip stocks are considered a solid foundation for a dependable investment portfolio for several reasons. They offer many benefits:
- Stability: These stocks are less volatile, making them a safer choice during economic downturns.
- Dividends: Blue-chip companies usually pay regular dividends, offering a steady source of passive income.
- Growth: Although their growth rate might be slower than other investments, blue chip stocks generally increase in value consistently over time.
Advantages of Investing in Blue Chip Stocks
The financial strength, excellent market valuation, and reliability of blue chip stocks offer numerous benefits to investors. Blue-chip stock investors enjoy the following advantages:
- Stable and Regular Dividends: Regardless of market conditions, blue-chip stock investors receive stable returns through dividends, typically paid quarterly.
- Opportunity to Achieve Financial Goals: With an investment horizon of over 7 years, blue chip shares provide investors with ample time to build a significant corpus for their financial goals.
- Portfolio Diversification: Blue-chip companies are large businesses with diverse revenue streams. This helps cushion against operational setbacks and allows investors to spread out the risks associated with blue-chip shares.
- Liquidity: Blue-chip companies have strong market reputations and high creditworthiness, enhancing the market value of their stocks. This makes buying and selling these stocks easier, providing high liquidity.
Disadvantages of Investing in Blue Chip Stocks
Blue-chip stock investors might face the following drawbacks:
- Slow Growth Rate: Blue chip stocks usually have a low growth rate, requiring investors to wait patiently for expected returns.
- Low Dividend Yields:Due to their slow growth rate, blue chip stocks might offer lower dividends.
- Comparatively Expensive: Blue chip stocks are in high demand due to their reliability, low risk, and stability, making them more expensive compared to other similar-sized stocks.
Who Should Invest in Blue Chip Stocks?
Investing in blue chip stocks is ideal for those looking to grow their money over the long term. These are solid, reliable companies that tend to perform well over many years, making them a safe choice for investors who prefer steady growth rather than quick profits.
However, if you are looking to make quick money or want your investment to grow rapidly, blue chip stocks might not be the best option. These stocks grow slowly and might not provide significant returns in a short period. For quick profits, you may want to consider other types of investments that offer faster growth.
Factors to Consider Before Investing in Blue Chip Stocks
Before investing in blue chip stocks, consider these important factors:
- Financial Health: Check the company’s financial statements to assess its financial stability.
- Performance History: Look into how the stock has performed during past market downturns.
- Growth Potential: Investigate the company’s future plans for expansion, innovation, and product development to gauge its growth prospects.
- Dividend Yield: Compare the dividend yield with other blue chip stocks and fixed-income options to evaluate its attractiveness.
Bottom Line
Blue chip stocks are a solid choice for a long-term investment portfolio due to their stability and growth potential. However, it’s essential for investors to stay informed about market trends and thoroughly research their options. Investing in blue chip stocks can be a smart strategy for achieving long-term financial goals. They are known for their stability, reliable returns, and potential for dividend income.
But remember, no investment is without risk, and blue chip stocks can also face short-term volatility. Therefore, it’s crucial to evaluate how these investments fit with your personal goals and risk tolerance. Ready to invest in blue chip stocks? Open a Demat account with Angel One today to start your journey towards smart and secure investing!
FAQs
What are blue-chip stocks?
Blue-chip stocks are shares of well-established, financially stable companies with a history of reliable performance. They are considered safe investments due to their stability, regular dividends, and steady growth over time.
Are blue-chip stocks good for long-term investments?
Yes, blue-chip stocks are ideal for long-term investments due to their stability, reliable dividends, and steady growth. They are suitable for investors seeking to build wealth gradually over time.
What is the risk associated with blue-chip stocks?
Blue-chip stocks are considered low-risk investments due to their stability and strong financial performance. However, they are not risk-free and can experience short-term volatility and slower growth compared to other investments.
Can blue-chip stocks lose value?
While blue-chip stocks are generally stable, they can still lose value during market downturns or due to company-specific issues. However, their strong fundamentals typically help them recover over time.
How do I start investing in blue-chip stocks?
To start investing in blue-chip stocks, open a Demat account with a trusted brokerage, fund your account, and begin purchasing shares of well-established companies. Research and choose stocks that align with your investment goals.
