What Are Blue Chip Companies, And How Does It Work?

What are Bluechip Companies?

Blue Chip Companies are nationally and internationally known companies. They are reputed, well-established, and financially strong companies. They generally sell high-quality, widely accepted goods and services. The investment made in these companies is considered to be safe.

Large-cap firms are also known as bluechip companies because they have substantial capital, are dependable, and have a long history. Bluechip firms have a track record of surviving market turbulence and providing consistent returns during good and difficult periods.

Examples of Blue Chip Stocks

A multinational corporation that has been in business for a while is considered a blue chip company. Consider businesses that dominate their respective markets, such as Coca-Cola, Disney, PepsiCo, Walmart, General Electric, IBM, and McDonald’s.

Bluechip companies typically trade on a large stock exchange like the New York Stock Exchange or the Nasdaq, though it is not strictly necessary. They are frequently included in market indices like the Dow Jones Industrial Average, the Nasdaq 100, or the S&P 500.

Bluechip companies have developed a strong reputation over time, and the fact that they have survived numerous economic downturns makes them reliable investments in a portfolio.

Why is the term Blue Chip used for Large Capital Companies?

The phrase “blue chip” derives from the poker game, in which the blue chip has the highest value among the red, white, and blue ones. The term “bluechip stocks” now refers to stocks that ensure quality and dependability rather than necessarily those that are trading at the highest price. Companies with a high market capitalization, a strong balance sheet, a low or steady debt-to-equity ratio, or no debt are well recognized in the marketplace.

They achieve good returns on equity (RoE) and assets (ROA). ROA shows how efficiently the company uses its assets and generates profits without considering debt. When determining the share price, debt is considered with the number of investors and earnings. If a blue chip company is debt-free or has little debt, its RoE and RoA may be equal or less different.

Blue Chip Companies in India

A blue chip corporation with adequate capital is a leader that displays steady growth each fiscal year. These businesses are well-known worldwide, and both the domestic and global markets are dominated by their products and services. As a result, when we think about investing in blue chip firms, we can be confident that our money is safe and secure because these huge corporations can withstand any financial crisis without being impacted by market volatility.

Examples of Blue Chip Companies in India are Tata Consultancy Services Ltd. and Infosys ltd. , Nestle India Ltd., etc.

What qualifications are required for a company to be considered a Blue Chip Company?

The brand is well-known

The company should possess a good reputation and is well established. Here, let’s look at two cases. Nestle, a well-known brand in India, produces Maggi, Nescafe, and other popular items. A few years ago, Nestle suffered a significant setback when the whole stock of Maggi had to be returned due to problems with the testing process. Although there was a small change in the stock price, Nestle, a well-known company, recovered well and returned to the market. On the other hand, let’s think about recent comers like Twitter or Facebook. Despite their fame, they do not fall under the heading of “Blue Chip Companies.”

Credibility and Reputation

Blue Chip businesses are well-known and offer frequently used goods and services. They have successfully navigated the volatility while surviving market crises and other financial disputes. Their balance sheet is solid, and profits increase annually. Take Reliance Industries, Tata Group, or ITC as examples. Their goods and services have long been in demand, and consumers have consistently had faith in them.

Well-capitalized

A blue chip business typically requires billions of dollars to operate. Blue chip companies faced a test in 2020, and many failed terribly due to inadequate capitalization. Let’s use Sun TV Network Ltd. and Hindustan Unilever Ltd. as examples of companies that experienced significant post-pandemic losses. However, due to years of decline, they lacked the capital necessary to qualify as blue chip businesses.

“I’d like to be a geneticist to be honest, but there are limits to what I can do now. For my dream to come true, I’d have to be 20 years old again, heading off to a blue chip university.”

Adam Faith, financial journalist

Features of Blue Chip Companies

• Less Volatile – Due to their institutional significance in the economy, blue chip firms are viewed as less volatile investments than companies with less prestige. The equities are quite liquid since individual and institutional investors routinely trade them on the market. Because there will always be a buyer on the other side of the transaction, investors who suddenly need money can confidently sell their stock.

• Increased Dividend – Large market capitalization, a stable debt-to-equity ratio, minimal to no debt, and high returns on equity (ROE) and return on assets are further characteristics of blue chip corporations (ROA). All blue chip stocks have received investment-grade bond ratings due to their strong balance sheet fundamentals and significant liquidity. Although paying dividends is not required for a stock to be categorized as a blue chip, most blue chips have a lengthy history of paying constant or increasing dividends.

• Blue Chip Index – A bluechip index, which can also be used as a measure of business or economic performance, allows investors to follow the performance of bluechip equities. One of the best, The Dow Jones Industrial Average (DJIA), one of the most well-known bluechip indices, includes most publicly traded bluechip stocks. Even though changes to the DJIA index are uncommon, investors who follow blue chips should constantly keep an eye on it to stay informed of any changes.

• High Liquidity – Individual and institutional investors often trade them because of their popularity and reputation. This demonstrates bluechip stocks’ strong liquidity and straightforward trading on exchange platforms.
• Represent the country’s economic situation – Due to their shared institutional standing in the economy, they also represent the country’s economic situation.

“As blue chips turn into penny stocks, Wall Street seems like a symbol of America’s macho capitalism and more like that famous Jane Austen character Mrs. Bennet, a flibbertigibbet always anxious about getting richer and her ‘poor nerves’.”

Maureen Dowd, New York Times Op-Ed columnist

Why should we invest in Blue Chip Companies?

Credit-worthiness

The capacity of a business to pay back its creditors is called creditworthiness. In addition to making timely loan repayments, a credit-worthy business pays dividends and earnings to its shareholders. The dividends are typically paid out every three months, and bluechip firms are known for being a secure place for investors to invest their money. They are less risky than ordinary equities, even though they have related market risks.

Liquidity

Bluechip stocks are often bought and sold in the market due to their creditworthiness and stability. When investors require cash, it becomes simpler for them to sell their equity holdings. Bluechip fund managers can similarly readily invest in and exit from such stocks. One of their strongest features is that blue chip companies offer significant liquidity.

Long-Term Financial Goal

While investing in equities might help you generate cash, bluechip stocks will allow you to build up a corpus over time. They have steady but modest growth, are safe investments, withstand market turbulence, and boost capital growth. Long-term financial objectives can be met by building wealth through blue chip investments.

Stability

Bluechip stocks have a history of providing their investors with reliable and steady profits. Their reputation encourages other investors to participate, and a significant financial inflow keeps them afloat in difficult times. Additionally, they support long-term wealth accumulation while expanding consistently during economic cycles. It helps to diversify investors’ investment profiles and reduces the risk burden.

“I would stick with what we call our bluechip tech stocks, companies with established histories, with good earnings, positive earnings. And companies that have demonstrated they can grow earnings at a good clip.”

Alan Hoffman, Project Finance Practice Chair

Advantages and Disadvantages of Blue Chip Companies

Advantages

Because they are well-known in their particular industry, blue chip firms are also seen as a successful and typically low-risk method of investing money. Bluechip companies often offer regular dividend payments and growth with little volatility. Furthermore, these businesses are unlikely to have a sudden credit or liquidity emergency due to their consistent cash flows and track record of repaying their loans.

1. Less risky than other stocks.
2. Reduced volatility
3. consistent dividends and returns.

Advantage of Taxation 

Bluechip stock-related capital gains are taxed as income under Section 80 C of the Income Tax Act in India. Long-term capital gains (LTCG) are taxed at a rate of 10%, compared to 15% for short-term capital gains (STCG). However, LTCG is only taxed if the gains are greater than Rs. 1 lakh. The first lakh rupees are exempt from tax.

Disadvantages

The drawback is that blue chips typically offer poor returns because they are low-risk investments. These businesses have fewer opportunities for growth than smaller firms because they are already well-known in their respective fields. In addition, blue chip stocks frequently cost more than other businesses of a similar size due to the high demand for their shares.

1. Compared to less well-known companies, returns are typically lower.
2. Blue chip companies are less likely to see significant growth since they have a smaller growth window.
3. Blue chips are typically more costly than comparable stocks because they are in high demand.

Blue Chip Funds 

What Are Stocks Considered Blue Chips?

Leaders in their respective markets, like IBM, General Motors, Coca-Cola, or McDonald’s, are typical examples of blue chip stocks. These businesses have a lengthy history of consistent growth and low volatility, indicating they are unlikely to experience significant issues soon. Blue chips are companies with a strong credit rating, a sizable market cap, a listing on the NYSE, or another significant stock exchange, frequently included in significant stock market indices.

A Blue Chip NFT: What Is It?

A digital artwork or souvenir produced by one of the most respected participants in the non-fungible token market is called a “blue chip NFT.” These businesses are viewed as less dangerous than some of their upstart rivals because they are more established in the NFT sector. It could be a stretch to call a speculative asset like digital assets a “blue chip,” given how new and hazardous the industry is.

Conclusion

Bluechip companies are large-cap stocks with strong market reputations and a track record of consistent growth. Most large-capitalization businesses have several sources of income, enabling them to withstand operational and financial losses. It spreads out the market risks and makes investing in stocks safer because they earn income from various sources. Because of this, they develop a brand name, are easily traded, and are very liquid.

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Frequently Asked Questions(FAQs)

• Can Passive Investors Benefit from Bluechip Stocks?

Ans: Blue chips are less prone to economic shifts, industry news, and other factors that can generate volatility than other equities because of their steadiness. They may therefore be wise investments for those who want to watch their money develop gradually without constantly monitoring the market or engaging in regular trading.

• How are blue chip stocks operated?

Ans: Shares of very large, well-known companies with a long history of successful financial performance are known as “blue chip stocks.” These stocks are renowned for their durability in challenging market conditions and capacity to deliver attractive returns in favorable market conditions.

• How can you identify blue chip stocks?

Ans: You can invest in various mutual funds (MFs) and thematic exchange-traded funds (ETFs) that track the bluechip companies you want to buy, or you can buy individual bluechip stocks using your Demat and Trading account.

• Do Bluechip Stocks Carry Lower Risk Than Other Stocks?

Ans: Due to the mature, financially sound, and historically profitable businesses they represent, blue chip stocks are typically seen as less risky than other types of equities. The value of Blue chips fluctuates as all equities do, but over the long run, they generally produce moderate gains rather than losses.