What are Blue Chip Stocks ?4 min readReading Time: 3 minutes
If you are a newbie investor, eventually you will come across the term ‘Blue-chip stock’. This term is relatively new to you and we will help in breaking it down for you in the best possible way.
A blue-chip stock usually and typically belong to companies that are financially sound and have been in the business for a long time. These stocks are of companies who have made it big in the market and which have had a healthy operation for quite a few years and have dependable earnings.
They are high-priced market stocks, which have eventually emerged as a preferred investment option over recent years for several investors.
These stocks are aimed at paying a steady dividend to their investors. Some of them tend to be high yield dividend stocks in the long run.
Individuals can invest in blue-chip stocks in India either directly or through mutual funds. Blue-chip stocks are stable and pay high dividends, but they are typically expensive and grow over a long period of time.
How Was The Term ‘Blue-chip stocks’ Coined
The origin of this term can be traced back to a Dow Jones reporter. According to some, this was first coined by a certain Oliver Gingold (an early reporter employee of the company that would later be called Dow Jones) Once, when Gingold was standing by the stock ticker, noticing several trades at 200$ or $250 a share or more, he said to his colleague that he intended to return to the office to “write about the blue-chip stocks”.
Who Should Invest In Blue-Chip Stocks
Blue-chip stocks are ideal for investors who are seeking to reap the benefits of getting high returns on capital. Also, the ones who are looking to generate regular periodic income as a dividend is paid quarterly for blue-chip stocks.
These stocks make up for excellent retirement savings for the simple reason they are highly-valued, excellent long-term investment options.
Why Invest In A Blue-Chip Stock?
These make a decent investment for investors who are ready to hold on through thick and thin, and through market cycles. While they may not be among the ever buzzing stocks, they however could turn fortunes over the long term. Blue-chip stocks tend to make money for the shareholders who have been patient.
The assured returns is something that attracts investors toward these stocks as they generate returns quarterly in the form of dividends.
The gains generated through blue-chip shares in India are treated as income under Section 80 C of the Income Tax Act. The short-term capital gains are subjected to taxation at the rate of 15%. However, the long-term capital gains exceeding Rs. 1 Lakh are subjected to taxation at the rate of 10%.
The period investment for these stocks is usually for over 7 years. Such extended terms make blue-chip suitable for achieving long-term financial goals considering its long investment commitment.
Demerits Of Investing In Blue-Chip Stocks
These stocks are a favorite of retired people and rich investors, owing to the reason that these stocks are considered for the long term and a new investor usually wants to make money by investing in short-term stocks.
Blue-chip investments are low risk, low return investments in the short-term. In the case of these kinds of stocks, it’s rather advisable to diversify your portfolio when investing in individual stocks, to avoid company risk.
They may not be the best for smaller investors considering that they are priced on a higher scale and have an increased focus on dividend payments. They also have a higher downside risk as against a small upside potential.
The future growth prospects of Blue-chip stocks may not be as fast as other quality stocks. You ask why? These companies have already made it so big within their own sector that the future growth rate could be relatively low.
All-Time Celebrated Stocks In The Country
Blue-chip stocks typically belong to the few of the most celebrated companies on the stock market and represent crème de la crème of equities.
Most Blue Chip companies in India have a market capitalization of above Rs. 50,000 Crs. These typically have a track record of consistently increasing their topline and operating margins on an upward trajectory.
Some examples of blue-chip stocks are Tata Consultancy Services, TCS, Reliance Industries, Housing Development Finance Corp or HDFC, Bajaj Finance, Maruti Suzuki, Bharti Airtel, and so on.
One can invest in blue-chip stocks if he/she is ready to invest over a relatively long amount of time and anticipating slow growth potential.