Defining a blue-chip stock
A "blue chip" stock represents a large, reputable corporation. These are huge, stable, and profitable businesses that have been around for a while and can reliably pay out dividends to their shareholders. Blue chip stocks are those of well-known, large corporations with market caps in the billions. These firms typically dominate their industries or rank in the top three. Investors choose blue chip stocks for all of these reasons and more. Blue chip stocks include corporations like IBM, Coca-Cola, and Boeing.
How does it work?
Although consistent dividend payments are not required for a stock to be labeled a blue chip, the vast majority of such stocks do have such histories. It's thought that the name comes from the game of poker, where the most valuable chips are colored blue.
In the United States, the Dow Jones Industrial Average, the Standard & Poor's 500, and the Nasdaq-100 are examples of blue chip stocks, while in Canada and the United Kingdom, the TSX-60 and the FTSE Index are examples of the most prestigious market averages and indexes.
Whether or not a corporation must meet a certain size threshold before being considered a blue chip is debatable. Although $5 billion in market value is considered the standard, corporations of any size can dominate their respective markets. Although the median market cap of the fund's holdings has historically been in the range of close to $100 billion, the T. Rowe Price Blue Chip Growth Fund does not have a specific guideline for what type of company qualifies, other than focusing on large-cap and mid-cap companies that are well-established in their industries.
How can a stock be considered a blue chip?
A blue-chip stock is the kind of stock you want to show off to your parents. It is impressive in both appearance and content. Maintains a steady, responsible, and trustworthy presence.
Stocks of blue-chip firms have historically performed well in both good and bad economic times. Some characteristics shared by "blue-chip" stocks are:
- Large market capitalization. The market capitalization of a corporation indicates how valuable it is to investors. Large-cap equities, such as blue-chip ones, are often valued at $10 billion or more on the market.
- Growth history. Blue-chip companies have proven track records of steady expansion and promising futures. They aren't as exciting as some of the fast-growing tech stocks, but that's because they have a long history of success.
- Component of a market index. A blue-chip stock is one that is included in a major market index, such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq 100.
- Dividends. Although dividends are not distributed by all blue chip stocks, many do. A company's dividends are periodic distributions of earnings to its shareholders. In general, dividend-paying corporations have reached a certain level of maturity and presumably have less need to reinvest earnings in expanding their business. (Are you keen on dividends?
Blue chip stock features
The features of blue-chip stocks are enlisted below –
- Assured returns: Reliable dividend payments every three months make blue chip companies an attractive investment option. Most investors choose to put their money into established businesses because they know they will be safe. Benefiting from this security is the confidence of receiving reliable but risk-free profits.
- Creditworthiness: Blue chip businesses typically have substantial cash reserves. For their part, this boosts the creditworthiness of the companies they issue stock.
- Risk factor: Blue-chip equities have a lower risk than other stocks because they are issued by large, financially strong firms. Diversifying an investor's portfolio is one way to lessen the impact of the risk associated with blue chip stocks.
- The typical time frame for investment is more than seven years. Due to its long Investment horizon: Blue-chip is well-suited to helping you reach your long-term financial goals.
- Growth prospect: Blue-chip firms are huge corporations that have realized their full growth potential. Blue-chip stocks, which increase in value steadily over time, are impacted by this.
- Taxation: The Indian Income Tax Act, Section 80 C, classifies profits made from investing in blue-chip stocks as taxable income. The 15% tax rate applies to short-term capital gains. However, long-term capital gains are taxed at a rate of 10% on amounts in excess of Rs. 1 Lakh.
Why should you invest in blue chip stocks?
You should diversify your portfolio so that no single stock or category of stocks makes up more than 10% of the total. Even if you're investing in companies that everyone agrees are reliable, it's still important to spread your money around.
If you want to diversify your portfolio, you need to invest in a wide variety of businesses. That includes businesses across a wide range of market capitalizations, product categories, and geographies. (Explore the several stock markets available to you.)
Nonetheless, due to their dependability, blue chips are favored by many investors, especially those who are more conservative or elderly. This doesn't make them immune to market downturns, but it does indicate that they have a track record of surviving them and coming out stronger on the other side.
Dividends are another attractive feature of blue chip stocks. Many retirees who invest do so in order to generate an income stream for themselves, making dividends an especially appealing feature of the investment landscape. Typically, payouts from blue chips are stable and increase over time.
Who must invest in blue chip stocks?
Blue-chip stocks are those that have a long track record of profitability with low volatility. A portfolio comprised primarily of such stocks would be a good choice for conservative investors. For those who don't want their money to fluctuate with the market, this is a solid investment option.
Advantages of blue chip stocks
Blue-chip stocks provide numerous advantages to their shareholders due to their superior financial health, market value, and creditworthiness.
The following benefits would be enjoyed by those who invest in blue-chip stocks: –
- Stable and regular dividends: Investment gains from blue-chip stocks are reliable regardless of market conditions. Such profits are distributed to them four times a year in the form of dividends.
- Opportunity to achieve financial goals: Having a time horizon of seven years or more as an investment or longer. There is a lot of leeway for investors to amass a sizable nest egg over the long term to use any way they see fit financially.
- The value of a diversified portfolio: Successful businesses, sometimes referred to as "blue-stock corporations," have several streams of income. This provides a safety net against operational setbacks and allows blue-stock investors to diversify their portfolios.
- Liquidity: Companies with a blue chip status have a solid reputation in the market and a high credit rating, which contributes to their high liquidity. There is a direct impact on the value of blue chip stocks, making them more appealing to investors. By making it easier to buy and sell, makes the stocks more liquid.
List of blue-chip stocks
Here’s a list of blue-chip stocks you might recognize.
- 3M (MMM)
- Alphabet (GOOGL)
- American Express (AXP)
- Bank of America (BAC)
- Coca-Cola (KO)
- Costco (COST)
- Goldman Sachs (GS)
- Home Depot (HD)
- IBM (IBM)
- Johnson & Johnson (JNJ)
- McDonald’s (MCD)
- Microsoft (MSFT)
- Nike (NKE)
- Starbucks (SBUX)
- Verizon (VZ)
- Visa (V)
- Walmart (WMT)
Blue chip stocks – are they a safe investment?
A blue chip company's apparent safety may not always be justified, even if it has weathered several storms and market cycles. In the wake of the worldwide crisis of 2008, many of the world's biggest financial institutions, including General Motors and Lehman Brothers, filed for bankruptcy.
Blue chip stocks in large portfolios
Although blue chip companies are useful as a foundation for a diversified portfolio, they should not make up the entirety of the investment strategy. Bonds and cash are common holdings in a balanced portfolio. Investors should think about including both large and small stocks in their portfolios. Investors under the age of 40 are more likely to allocate a bigger portion of their portfolios to stocks, including blue chips than those over the age of 40, who may want to preserve their wealth by putting more money into safer assets like bonds and cash.
Alternative investments to blue chip stocks
Blue-chip stocks in India carry a low-risk profile due to the companies' established reputations in the market. Because of the low risk involved, they are a good choice for cautious investors.
However, investors who want to generate larger returns with limited exposure to market dangers can select these other investing options -
Real estate
Real estate is one of India's most lucrative investment opportunities, despite a slight slowdown in growth. Income can be generated by the acquisition, leasing, or sale of commercial and residential real estate by investors.
Exchange-Traded Funds
ETFs are a group of securities that are traded on exchanges which are seen as a low-risk investing choice. Exchange-traded funds (ETFs) are a popular investment vehicle because they offer diversification across asset classes, a low expense ratio, and other cost benefits.
Gold exchange-traded funds (ETFs), liquid exchange-traded funds (ETFs), international exchange-traded deposits (ETDs), and bank exchange-traded deposits (Bank ETFs) are all available to investors.
Fixed deposits
Fixed deposit schemes are a better option than blue-chip equities for investors looking to produce returns while also taking advantage of tax benefits.
Investors can put their money in fixed deposits for either a short or lengthy period of time, depending on their needs. FDs also allow investors to avail of a loan against it in case of an emergency.
Government bonds
Indian government bonds are insured by the Reserve Bank of India and represent a low-risk investment choice. These bonds provide investors with a stable rate of return while also giving them the option to diversify their holdings. Government bonds provide liquidity to investors and provide tax benefits.
If you're looking for a way to invest your money that will provide you reliable returns over the long term, then blue-chip stocks in India may be a good bet. However, traders might increase their portfolio's profitability by investigating additional trading opportunities.
Before putting any money into an investment, they should also consider their long-term financial goals, level of income, and tolerance for risk.
FAQ
What makes a company a blue chip?
A blue-chip stock is a stock in a large, well-known, well-capitalized, long-term stable company that has strong financial prospects.
Which companies are blue chips?
Major corporations include IBM, JPMorgan Chase, and Walmart, which are all members of the S&P 500 or the Dow 30.
Where did “blue chip” come from?
Blue chip stock is a reference to the numerous colored chips used in the gambling game of poker, which stand for different denominations. When compared to white chips and red chips, blue chips are considered to have the highest value.
Are blue chips considered good investments?
Blue-chip stocks, or stocks of large, well-capitalized, and well-understood corporations, are one type of investment that could be included in a diversified portfolio. Mutual funds and exchange-traded funds (ETFs) offer another way for investors to gain exposure to blue-chip firms without having to buy individual stocks (ETFs).
How can you invest in blue chip stocks?
A trader can acquire blue chip stocks either directly from the company or indirectly through a mutual fund or exchange-traded fund (ETF) that targets blue chip companies. Blue chip equities are just one type of stock that some funds and ETFs hold. Sometimes the funds or ETFs will only invest in major, well-known companies; for example, an ETF may only invest in the 30 equities that make up the Dow Jones Industrial Average.