You often must have encountered the term “Blue Chip Stocks” or “Blue Chip Mutual Funds” and wondererd what exactly are Blue chip companies? And why such a term has been given to companies in the capital market in the first place? How does any company qualify as being ‘Blue chip’? Tighten your seat belts as we unravel the complete guide of Blue Chip companies containing all you need to know about them to make wiser financial decisions.
Blue Chip Companies: Meaning
Think of IBM, Walmart, and McDonald’s. What do they have in common? Although they are all from different industries, they all qualify as Blue Chip companies. Blue Chips are highly reputed, well-established, and financially outperforming companies that have made significant profits in recent years. They mostly perform on a global level, selling high-quality products and services, and are trusted entities in their industry.
These widely recognized companies are known to produce stable returns over a long period of time and are suitable for the conservative investor. It means that people who want low risk and slow and steady returns opt for such kind of companies to invest in. People nearing retirement also bend towards Blue Chip Stocks as they are great for capital preservation.
Such companies usually have a market value of hundreds of crores and are have a history of giving out dividends as a form of profit-sharing to their investors. Benjamin Graham, popularly known as Warren Buffet’s mentor wrote in his book, The Intelligent Investor that a conservative investor should look for a company that has paid dividends in the last 20 years. The fact that these are well-established companies suggests that they have been in the market for decades and hence, have survived all the major downfalls of the Stock Market like recessions and depressions.
For instance Companies like Coca-cola, Walmart and Disney witnessed a complete change in the working conditions after the 2008 financial crisis. This gives investors confidence in the companies. However, it is the generic meaning of such companies, and investment decisions should not be based on the sole fact that a company is Blue Chip. Do your required research before putting money in any stock or fund.
Ok, but why are they called “Blue Chip”? Let’s unfold this fact.
Blue Chip: Origin and Brief History
In the game of Poker, there are 3 forms of ‘Chips’ or tokens i.e White, Red, and Blue holding different monetary values. The ‘Blue Chip’ represents the highest value among all. White, Red, and Blue go in ascending order which means, white holds the least value, going up in that order.
For instance, if the White Chip is of Rs.100, the red would be of Rs.300 and finally Blue of Rs.500. This is why companies with a high capital are referred to as ‘Blue Chip’ companies denoting a large value.
This term is used in the world of the Stock Market for ages and is widely recognized by experts and investors in the industry. Since exactly when you ask? Well, it is known to have originated in 1923 when a Poker player working in the Dow Jones Industrial Average index referred to a large capital company as blue-chip. What Oliver Gingold casually said on a working day became a part of the stock market terminology. Fascinating, isn’t it?
Let’s understand a little more about such companies and their stocks by the features they possess.
Blue Chip Stocks: Characteristics to Know
Blue Chip stocks are comparatively less volatile than mid-cap or small-cap stocks. Since they are the (business) sharks of the share market, betting on them is a non-aggressive move. These conglomerates have a reputation to uphold and a status to maintain. Thus, investing in Blue Chips stocks is less risky. However, the ever-green rule applies here i.e Less risk=Less returns. They produce relatively lesser Return on Investment (ROI) and interest for the shareholders. This is because they have less growth potential, already being market leaders.
In addition to this, their well-established feature makes them known to the masses and thus, is highly traded. The more the frequency of a stock trading, the more liquid it is for an average investor to trade. Blue-chip stocks offer high liquidy which means that one can easily sell them off when in need and find buyers at all points of time. Although, it is advisable to not lay off these stocks until absolutely necessary as they are long-term financial products that build wealth over a period of time not less than 5-7 years. Blue Chip companies are characterized to have almost no debt and very less NPA.
They are listed on popular exchanges like the National Stock exchange (NSE), The Standard and Poor’s (S&P)500 index, NASDAQ 100 and Dow Jones Industrial Average, etc. A generic standard for a company to be called Blue Chip is a minimum capitalization of $5 Billion.
However, not every company reaching this threshold is characterized as a blue-chip company. Facebook is a good example of this. Although it is a market leader in the social media world, with a capitalization of about $600 billion as of May 2020, it does not qualify as a Blue Chip company as it was founded in 2004 and thus does not adhere to the status of ‘well-established’. So, not every well-known company is Blue Chip.
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Investing in Blue Chip Companies: Is it Good?
The mere status of being a Blue Chip company does not make it a good investment decision. There are several other factors one should consider before placing their money in such stocks. The careful evaluation includes tracking the dividend payments by the company over years, it’s a debt-to-bond rating, earning potential and interest payments. While there are a lot of Blue Chips to explore, you must choose one which suits your portfolio strategy.
To invest in Blue Chip stocks, you must have a Demat account and Pan card. You can invest in two ways:
1. Direct:
Direct investment means there is no middleman or broker between you and the Asset Management Company(AMC). It can be done online by visiting the company’s portal or offline by visiting a physical branch office.
2. Indirect:
Such kind of investment is done via a financial manager/advisor or a stock broker. This could be through a full-service broker or a discount broker you select. In this, you will receive third-party assistance with your investments but will have a pay a certain amount of brokerage or fee for their services.
Blue Chip Stocks vs Blue Chip Funds
While they are used in the same context and have similar characteristics at large, Blue Chip Stocks and Blue Chip Mutual Funds are different investment products. The stocks are mere shares of a Blue Chip company being traded on an exchange. However, Funds are a pool of such stocks known as Large-cap funds. Let’s look at some examples of the two to get a better idea:
Blue Chip Stocks: List & Examples
- Hindustan Unilever (HUL)
- Indian Tobacco Company (ITC)
- Tata Consultancy Services (TCS)
- Infosys
- State Bank Of India
- Reliance Industries etc.
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Blue Chip Funds: List & Examples
- Mirae Asset large-cap fund
- SBI Bluechip Fund
- ICICI Prudential Bluechip Funds
- Kotak Bluechip fund
- Axis Bluechip Fund
- Principle emerging Bluechip fund etc.
Did you notice the difference? While stocks are of a specific company, Funds collect resources to invest in different equity products of such companies. Still a little confused? Let’s understand it this way, Mirae Asset large-cap fund holds % share in Blue chip companies of 10 different sectors from finance to technology and healthcare.
Blue Chip Companies: The Bottom Line
We can conclude that Blue Chip stocks are considered good for your financial health. However, the first rule of investment applies universally that is, ‘Never put all your eggs in one basket’ so it is ardent that you diversify your portfolio with mid-cap and small-cap funds as well according to your time frame and risk appetite. A well-diversified portfolio contains a fair share of debt instruments as well as cash holdings.
We hope you have now completely understood the concept of Blue Chip companies, stocks, and funds. Please feel free to share your queries or thoughts about it below.