What is Blue Chip Company & Why Invest in Blue Chip Stocks? | 5paisa (2024)

Blue chip companies have established, long-lasting brands that consumers trust. They are reliable businesses to have in a portfolio due to this and the fact that they have survived numerous economic downturns.

Due in part to their long histories of steady and predictable growth, blue chip companies continue to operate profitably in spite of challenging economic situations.

What are Blue Chip Stocks | Benefits of Blue Chip Stocks | Blue Chip Stocks

Here we will learn everything about what a Blue Chip Company is and whether it is advisable to invest in them or not!

What is A Blue Chip Company?

If you have tried a game of poker, you would know that the blue chips represent the highest dollar value in the game as compared to the white and red poker chips. Oliver Gingold, an employee of Dow Jones, gave businesses the phrase ‘Blue Chip’ in 1923. Thus, this term has been included in the stock markets and is an attribute to well-established and well-performing companies.

Blue Chip Company Definition – A blue chip company means an established company that has a large cap, a stable reputation, several years of growth and success, and well-recognized products and services in the business world.

What Are Blue Chip Companies In India?

A well-capitalized blue chip company is a pioneer that exhibits stable growth each financial year. The whole world knows about these organizations and their goods and services dominate the domestic and international fronts. Thus, when we consider investing in blue chip companies, our investments are considered safe and secure because of the capabilities of these massive businesses to survive any financial turmoil and not be affected by the volatility in the market.

What Qualifies a Company as a Blue Chip?

Let us understand the characteristics and features that make an organization a blue chip company:

The Brand is Well established

The business should be well-known and well-established. Let us take two examples here. Nestle a big brand in India makes many products like Maggi, Nescafe, etc. There was a big blow to Nestle a few years ago when the entire stock of Maggi had to be returned because of testing issues. There was a slight variation in the stock value, but Nestle being a big brand, overcame this blow and was back in the market standing strong. On the other hand, let us consider newbies like Facebook or Twitter. They are undoubtedly famous but still don't come in the category of 'Blue Chip Companies'.

Reputation and Credibility

Blue Chip companies are extremely reputed and have products and services that are widely used. They have survived market crises, and several financial controversies, sailing through the volatility smoothly. They have a strong balance sheet and profits grow each year. Let us look at examples like Reliance Industries, Hindustan Lever, or ITC. Their products and services have been in demand for years and the trust of the consumer has never waivered in them.

Well-Capitalized

A blue chip company normally runs on billions of dollars. 2020 was a testing time for blue chip companies that miserably failed because of poor capitalization. Let us consider examples like Sun TV Network Ltd, or Godrej Agrovet Ltd, who suffered major losses post-pandemic. However, due to years of decline, they were nowhere near capitalized enough to be blue chip companies.

The Role Of Stock Indexes

Blue chip security is a safe bet and is part of major stock market averages and indexes. For Indian businesses, the market standard is S&P CNX Nifty - a well-diversified 50 stocks index of companies from 14 sectors of the economy. Blue chip stocks are high-priced market stocks that are highly respected in the stock market because of their stable financial position and credibility. These companies pay attractive dividends and are highly sought-after by many.

Blue-chip companies can influence the economic strength of a country and you can regularly monitor their performance in financial news. These investments made in Blue Chip companies are considered less risky and less volatile which is why these are extremely popular among investors.

Characteristics of Bluechip Companies

Companies with large market capitalization and a strong market reputation are called blue chip companies. The shares they issue are highly valued and have significant features like:

1. Guaranteed Returns: Blue chip stocks generate returns in the form of dividends every quarter. Since these are profitable organisations, with their financial data out in the open, it is easy for investors to gauge the profit margins of these companies and the dividends they share with their investors.

2. Growth Prospect: Blue chip companies display the highest and most consistent growth potential because of which the blue chip stocks rise slowly but steadily over time. Companies like Coca-Cola, Nestle, McDonald's, are on the Fortune 500 List and can be trusted, as they have displayed growth and profitability for so many years.

3. Creditworthiness: Blue chip companies have sufficient capital to easily meet their financial obligations. These stocks are found on the National Stock Exchange (NSE), so you can analyse the goodwill and credibility of Blue Chip Companies.

4. Investment horizon: The duration of the investment is generally greater than 7 years so these are best for meeting long-term financial goals.

5. Risk Factor: Investors can associate with blue chip stocks by diversifying their investment portfolio as the risk factor associated with blue chip companies is relatively lower.

6. Taxation: Gains from blue chip equities in India are treated as income under Section 80C of the Income Tax Act. Short-term capital gains are taxed at 15%. However, the long-term capital gains of over Rs. 1 Lakh is subject to a tax rate of 10%. further, reduce the risk burden

Should You Be Investing in Bluechip Stocks?

It entirely depends on your preference, risk appetite, objectives, and time horizon. However, it is recommended to invest in blue chip company stocks because of the following benefits you can attain:

1. Invest if you want to achieve consistent returns.

2. You can achieve long-term financial goals. These tocks facilitate the construction of a sound investment corpus.

3. These stocks are least affected by inflation, volatility, stagnation, or recession

4. They are quite predictable, so for people who are looking for safety and security in investment, blue chip stocks are a good option

Think About These Attributes Before you Can Invest in a Bluechip Company

Blue chip stocks are highly priced and may not be suitable for modest or retail investors. These stocks also grow gradually as they are already close to their maximum growth potential. New investors with a moderate risk profile can go for these stocks, provided they value consistency. Before you consider investing in blue chip stocks, do your homework, research well on the company you want to invest in, and consider the following:

● Market Capitalization - It should be more than 20,000 crores. This high valuation makes these investments expensive, but also more reliable.

● Income of the Company through financial statements - Their balance sheets and profit and loss statements can be accessed from their official websites and should be thoroughly looked at. You can also figure out the Debt equity ratio from these statements, which should be lower.

● Intrinsic Valuation of the Stock and the Company - The value calculated for each share or stock is important to consider as it is a forecasted value based on past performances. This will also help you judge their strong financials for the past 5 to 10 years

● Return on Assets and Return on Equity are important factors to consider, which give you a realistic figure, of how much investors have earned so far and how suitable will these investments in respective blue chip companies, will be for you.

Why Invest In Bluechip Companies?

Here are some of the key reasons, why you must invest in blue chip companies:

1. Reap the benefit from dividends - If a business is doing well year after year, it will have a substantial income to pay to owners, employees, investors, and other stakeholders as the company's fundamentals are solid. So, you don't have to worry about the security and risk associated with your investments in these blue chip companies.

2. Its strong management team will keep the company growing steadily, which in turn, will help you earn high profits on your investment portfolio.

3. You can diversify the risks associated with blue-stock equities.

4. Their good reputation and goodwill are a bonus as these market leaders are well-established because of profitability, quick access for franchisees, and control of distribution.

Conclusion

Blue chip companies have the strongest credibility and balance sheets. If you want to play safe in the stock market, want reasonable returns, and are looking for long-term investment, look no further and invest in blue chip companies after conducting thorough research on the past figures of the company you choose.