Blue Chip Stocks? How does Blue Chip ever relate to the financial term ‘Stocks’? Does reading the term Blue Chip make you think of those blue, round & flat chips with white patches on it that you probably must have seen on a TV show? Then you are on the right track!
At the end of this article, you will know how important this term is in this economic-driven world & why it is specifically called the “Blue Chip Stock”.
The Story behind the term “Blue Chip Stocks”
This famous term echoing through Wall Street even today comes from an employee named “Oliver Gingold” of a famous company “Dow Jones”.
The term got a push in between 1923-24. Gingold noticed that many shares were trading at $200 to $250 or more as he was standing by the stock ticker of a brokerage firm.
He returned to his office after noticing these high trading prices to write about “Blue chip stocks”. He related all the high priced stocks with the blue chips which are of the highest value in the game of poker.
Originally, this connotation was only related to high priced stocks but then later as time passed by, this term was broadly defined as high-quality stocks.
What are Blue Chip Stocks?
Many blogs or articles of blue chip stocks will start explaining it with complex financial terms that will make it extremely difficult for you to understand. Let’s make it a cakewalk for you. Consider this example:
There’s a student who’s consistently scoring well in his class & always secures first rank. His classmates always try to be like him by trying to know how he plans his day, how he studies & how much time he allot for his activities. They then try to benchmark his plan of action in order to compete with him.
The student here illustrates the “Blue Chip Company” of its particular economic sector that corresponds to the class in which he belongs to. His classmates trying to be like him can be a classic example of other companies trying to compete up with this blue chip company by following its roadmap.
How to identify a Blue Chip company?
Now that you know what blue chip stocks are, let’s gear up further on identifying these blue chip companies. There are certain variables you should keep in mind while trying to identify these blue chip companies, those are:
- Large Market Capitalisation: Blue chip companies usually have high market capitalisation.
- Fundamentally Strong Balance Sheet: These companies usually have minimum or no debts & generate more profit.
- Components of Benchmark Indices: Blue chip companies are most often a part of benchmark indices like Nifty 50, Sensex, etc.
- Dividend Payouts: Most blue chip companies often give dividends consistently which denotes that they gain sufficient annual profits.
- Resistance to Volatility: Since they are well-established companies, their stocks rate are mostly stable & do not fluctuate with market volatility.
- Strong Cash Flow: A strong cash flow means that a company is growing, but it can be negative as well. For example, a company is investing in its growth if there’s a positive cash flow from operations and negative cash flow from investing activities which is a good sign.
- Brand Credibility: People trust these companies more due to their brand value & the quality of products or services that they provide.
Why should you invest in blue-chip companies?
Blue chip stocks are considered as safe haven for investing. These shares are ideal for those investors who have long-term investment strategy. Some key qualities of why you should invest in blue chip companies are:
- Goodwill and Brand Image: Blue chip companies are the ones that have brought their name through the ranks by sheer hard work and determination to excel.
- Dividend Payouts: If you’re looking for consistent earnings then buying blue chip stocks can be the best type of investment because most of blue chip companies pay dividends to their investors which can help you to grow your wealth in the long-term period.
- Inflation Beating Capability: Blue-chip stocks are superior stocks which have inflation beating capability.
Is blue chip investment safe?
Blue chip companies have adhered to the market for a good number of years & have endured many worst economic cycles & recessions but have survived the worst of the market.
These companies are much less volatile & even if there poses a certain risk, the long-term investment horizon smoothens out this risk.
Sticking to the business for years, they have good control over the market which makes them much stable.
Also, with their strong fundamentals to add to the value of their safety factor, blue chip companies are often a safe bet to invest in.
Top blue chip companies
Here are a few top blue-chip companies who have stood on the pinnacle of the market for considerable years:
|Sector||Market Cap (in Cr Rs.)
as on 20th Mar 2020
|Rate as on
1st Feb 2005
|Rate as on
1st Feb 2020
|HIND UNI LTD.||FMCG||444,329.52||144.05||1396.98||2156.4|
|MARUTI SUZUKI INDIA LTD.||Manufacture||153,369.07||473.1||1421.79||7199.6|
How to invest in blue chip companies?
Blue chip companies are undoubtedly the Market Leaders, that have dominating powers over the competitive landscape. Soaring high over the competitive landscape, they enjoy brand royalty & credibility.
But there’s still one problem & that is how much proportion of blue chip stocks should one buy?
It is very much important to buy the right amount of blue chip stocks which help you to generate a considerable amount of wealth in the long-term. One of the best investing platforms which can help you to choose the right proportion of stocks in your portfolio is StockBasket.
StockBasket is a basket of expert-curated stocks that helps investors to build wealth. One such basket is Market Leaders basket which is designed for investors to grow with the No. 1 companies in some of the fastest-growing sectors of the country.