What are Blue Chip Stocks ? : Should You Invest In Them ?

Blue chip stock is the stock of a company which has a great cash flow statement and balance sheet. Such companies are reliable and trustworthy. These companies have a constant and growing mode of income. Also they are well established. These companies have the best market capitalization and are generally the leaders in their segment of business. Hence due to all these characteristics these companies are so much famous and reliable for investment purposes. 

The best blue chip stocks in the world are :

• JOHNSON & JOHNSON
• BERKSHIRE HATHAWAY
• 3M
• J.P MORGAN CHASE AND CO.
• PROCTER & GAMBLE
• COCA-COLA
• APPLE
• MICROSOFT
• NETFLIX
• ALPHABET
• VISA

These blue chip stocks have a lot of power within their country and economy. A fall or drop in share price of such companies changes the entire trend of their domestic index. These indices are an indication of the nation’s economy. The indices have a direct effect on the world market. Hence the blue chips can change the flow of the entire world market.

Basically blue chip is a poker term. In poker blue chips are the most valued chips and hence the name blue chip is attached to the best stocks in the market.

Blue Chip Stocks in India

India is a land of diversified industries and hence the investor base has a great preference and choice for blue chip companies. The blue chip companies in India are classified from the market capitalization they have. The higher market capitalization represents the trust of people in it.

The best blue chip stocks in India are :

• TATA CONSULTANCY SERVICES (TCS)
• HINDUSTAN UNILEVER (HUL)
• INFOSYS
• RELIANCE
• HDFC
• HDFC BANK
• AIRTEL
• ASIAN PAINTS
• ITC
• NESTLE
• HCL TECHNOLOGIES

These companies are having the best market capitalization and are the leaders in their own segment. For instance TCS is having the best market capitalization among IT companies and is one of the most trustworthy companies of India. Reliance on the other side is not trusted widely but it has the highest valuation in the NIFTY50 index. Hence a drop in Reliance changes the face of Indian markets.

Blue Chips and Investors

Investors have heavy investments in blue chip stocks. The reason is very simple. Such blue chip stocks have a high possibility of price improvement constantly. Also the dividend stream of such stocks is either consistent or increasing. Though none of the equities are bound to pay dividends but the blue chip stocks have a consistency in the same category. This increases their valuation and reputation in the market. Often such blue chip stocks are referred as safest equities to bet on given their market capitalization and segmented position. 

The blue chips are stable and can get past any economic hit. The best instance is the situation of COVID. Due to the COVID hit all the companies in India faced a major hit in valuations. This resulted in a bloodbath on Dalal Street. All the companies including Reliance, TCS, Infosys etc. were trading at 50% price than before. Thus people suffered heavy losses. But post the lockdown phase if we look at the current situation the markets have recovered and all the blue chip stocks have recovered handsomely from their March lows. They have not only gained their original price tags but have achieved three fold growth in valuations. Hence the investors not only got their money back but earned from these stocks by just being patient.

Basic Characteristics of Blue Chip Stocks

• They provide consistent returns

The blue chips have a constant expanding characteristic. The founders come and go, the CEO’s serve their tenure and retire but the company’s functioning never stops and it keeps on growing and diversifying itself. Due to the constant diversification in companies their revenue streams keep adding up. This provides them with additional income opportunities and hence their earnings keep on increasing. This provides a better EPS and hence the valuation of stocks increases as well.

• They are financially stable and strong to go through a worst situation

As mentioned above The companies can go through any financial crisis and can survive through the worst economic hits. This is because the pockets of such companies are flushed with cash kept as reserves to deal with such situations. Also not only investors but common people also prefer working in such companies given the high chances of their long term survival.

• They are having a low risk profile

Such companies have a low risk profile because they have a diversified stream of income. They not only earn from their primary business but also have added businesses in their portfolio. Hence this provides a backbone in their revenue streams. So if possibly one sub company does not perform well the others can compensate for the earnings and hence the companies never go out of business under normal circumstances. Also the banks are always ready to provide loans to such companies whenever they need a low interest rate. This gives the companies a benefit among the others. Hence they can survive any financial crisis.

• They provide a good diversification in the portfolio of an individual

Any investor can have two to three blue chip companies in his portfolio to balance the risk of penny stocks or commodities in the investment profile. This gives the investor a good balancing opportunity for maintaining a low risk profile and gaining constant returns. To summarize we can say that, “The loss of one can be filled up with the profits of others.

• They have high growth prospects

These companies have high cash flow and hence they keep diversifying themselves. The constantly keep diversifying their product mix. Such companies adapt the changes and modify them as per the needs of the consumer. Hence they have better growth opportunities.

Pros

• The blue chip companies provide a stable and constant flow of dividends.
• One can expect a constant increase in value while dealing with blue chip companies.
• These companies have multiple and cheap sources of finance. Hence there are very rare chances of them going out of business. Hence one can expect that the valuation can never get null of.
• They provide a low risk profile when dealing with equities and do the job of balancing the portfolio when dealing with equities.
• These companies have high credit worthiness hence they are trusted across the entire market.
• They are preferred for long term investment options. Hence the long term goals attached to them are fulfilled easily through dividend income and increase in valuation.

Cons

• Such companies basically take a long time to present good returns. Hence the time period for money invested in one source increases. The average time period that people prefer is 5 – 8 years.
• Due to the high time period attached to it the tax applied on such gains is also more. As the gains fall under long term category one is complied to pay for 10% of income above 1 lakh Rs.

Should You Invest in Blue Chip Stocks or Not ?

It is preferable to invest in only blue chip stocks if possible. As per the definition of investing, it is for long term only. Hence for investment its better to choose a company which has stable future and better growth prospect. Of course one can take risks by adding other companies in the portfolio but the blue chips serve the purpose of balancing the portfolio of any investor. Hence one should definitely have two to three blue chips in his or her portfolio.