The term “Blue-Chip” has a direct reference to blue-colored poker chips that have the highest value. In financial markets, blue-chip is used to signify stocks of companies that are well-established, have large market capitalization and have a good reputation or brand value in the market. Blue-Chip companies are the market leaders and have a consistent performance history. These companies tend to have stable financial records and credibility and thus they can extend handsome dividend payouts to their investors on a regular basis. Any investor can invest in blue-chip stocks either directly or through mutual funds. Blue-Chip stocks are viewed as secured, stable, and less volatile by investors. These stocks are considered one of the safest investment avenues in the equity market.
Features of Blue-Chip Stocks
- Risk and Returns: Blue-Chip stocks are considered as one of the safest investment options and can bear economic downturns as they are less volatile in nature. They offer moderate growth potential with steady and regular dividend pay-outs (normally on a quarterly basis). Since these stocks are issued by big companies, the risk associated with them is comparatively less. Further, investors can reduce their burden of risk by diversifying their investment portfolios.
- Investment Horizon: The majority of the blue-chip stocks normally have a long-term investment prospect spanning over 7 or more years. These stocks are suitable for achieving long-term financial goals.
- Stable Long-term growth: Although blue-chip companies are already well-established, they do provide slow but steady growth over the long time horizon.
- Less Volatility: Blue-chip stocks belong to financially sound companies with competent management and strong corporate governance. Thus, these stocks are less volatile in nature.
- Credit Worthiness: These companies hold high creditworthiness and thus have the capability to pay off their debts and other financial obligations. This makes the shares issued by them highly creditworthy with negligible chances of default.
Who Should Invest in Blue-Chip Stocks?
Blue-chip stocks provide safe investment options to investors, and they also help investors in balancing their overall portfolio risk. Blue-chip companies are believed to be engaged in diverse business operations. As a result, it is commonly believed that even if a company’s financial performance is not as per expectations for some period, it can cover most of its losses in the long run through its other business segments. These stocks are generally preferred by the following types of investors:
- Cash-rich investors: Investors, who have experience in making high-value investments.
- Conservative Investors: Investors, who do not want their investments to be much affected by any major economic turmoil can invest in blue-chip stocks. Though these companies pay regular dividends, it is advisable for such investors to ensure sufficient diversification of their portfolios to avoid any company-specific risks.
- Passive Investors: As blue-chip companies have strong financials, investors who do not want to bother themselves with much analysis can simply put their money in blue-chip stocks to meet their long-term financial goals.
- Long-term Investors: Since most blue-chip investments offer better returns in long run, investors who are comfortable remaining invested for 7 or more years must consider these stocks.
- Other Investors: Any other investors should also consider having blue-chip stocks in their portfolio to balance their portfolio risk and returns.
Benefits of Investing in Blue-Chip Stocks
Investors should put their money in Blue-chip stocks considering that these companies are market leaders and are good at parameters like a strong balance sheet, minimal debt, consistent earnings, high dividend yields, and so on. The benefits of investing in blue-chip stocks are:
- Passive Income through Dividends: Blue-chip companies generally have huge cash surplus and stable earnings. Therefore, they can provide regular dividends to their investors, which acts as a passive income for investors.
- Highly Liquidity and Less Volatility: The blue-chip stocks are convenient to buy and sell. Blue-chip companies are characterized by a good market reputation and high creditworthiness, which enhances their value and makes them an attractive investment option for investors. This makes these stocks highly liquid in nature. Due to their financially sound nature and quality management, these stocks tend to be stable and less volatile.
- Portfolio Diversification: Blue-chip companies are generally engaged in more than one business operation. This not only provides a layer of protection against any losses or operational setbacks but also allows investors to spread out the risks of blue-chip stocks. Also, by investing in blue-chip stocks, investors can balance the overall risk of their portfolios.
- Long-term Returns: These stocks are known to provide stable earnings in the long run to the investors. Thus, being a long-term investment option, it gives investors enough time to build a corpus over the years to fulfill their respective financial goals.
Limitations of Investing in Blue-Chip Stocks
As Blue-chip stocks are generally viewed as a long-term investment option, these stocks are not suitable for short-term investments. Most of the blue-chip companies are at their stable and mature phase of growth and thus do not provide much potential for rapid growth in the future. Furthermore, prices of blue-chip stocks tend to be on the higher side as they are issued by big companies. Also, no company will always continue to be in its prime position. Thus, there is always a risk involved that a blue-chip company might lose its leadership in the market. Investors should be careful before committing their money to blue-chip stocks due to these reasons.