The term “Blue chip” comes from the game of poker, where the blue gambling chips holds the highest value on the table. Likewise, blue chip companies are those companies with large market stakes. The term “blue chip” stock was first coined in 1923 by Oliver Gingold, referring to high priced shares at a brokerage firm. These companies are less vulnerable to market fluctuations and as compared to medium and small cap companies.
Blue chip companies have the capability to resist unfavorable market conditions and yield high returns under favorable market conditions. They are categorized as the best companies in their respective sectors. The shares of these companies are called blue chip stocks or blue chip shares. These are premium companies that dominate the industry. These companies are highly esteemed in the stock exchange market and have a stable financial position and credibility. Such companies pay attractive interest that increases their growing popularity. Individuals can invest in these blue chip stocks either directly or indirectly through mutual funds.
Features of Blue Chip Stocks:
- Guaranteed Returns:
These stocks generate returns quarterly. As these companies are well established, they serve as a safe investment option for investors. Hence they assure stable returns.
- Credit Fitness:
Blue chip companies have enough funds to clear their financial dues easily. Thus the issued shares of such companies are of high credibility.
- Risk Factor:
The risk factor associated with blue chip stocks is very less. Also, the risk factor can be further reduced by diversification of the investment portfolio.
- Investment Tenure:
The investment tenure is generally over seven years. Hence, blue chip stocks earn decent returns over a long run. This makes blue chip sticks suitable for long term financial goals.
- Growth Perspective:
Blue chip companies are well established and have often reached their maximum growth potential. Thus, blue chip shares undergo slow but steady growth over the time.
The capital gains are taxable under the section 80C of the Income Tax Act. The short term capital gains tax is applicable at the rate of 15%. And, the long term capital gains exceeding Rs. 1lakh are subjected to taxation at the rate of 10%.
How blue chip stock helps in long term financial goals?
- Blue chip stocks are best suited to invest for long term financial goals. It generates higher returns that are paid quarterly.
- It helps in building wealth over a long run. It also diversifies the investment portfolio, and acts as a barricade against inflation, recession and economic slowdown.
- But due to their high price, it may not be suitable for small investors. Blue chip stocks offer multiple benefits to investors. Irrespective of the market conditions blue chip stocks provide regular and stable returns to the investors.
- Being a long term investment plan, It gives plenty of time to the investors to accumulate wealth for their long term financial goals.
- Blue chip companies generate revenue from various sources. Hence, the investors money gets spread out in various avenues, diversifying their investment portfolio. Blue chip companies have the best market goodwill and have high credit ratings.
- Hence, they are attractive investment options for investors. This facilities their easy trading in the stock exchange market and hence makes them liquid in nature.
- Individuals with a good knowledge of financial markets and who have enough time to keep a track of these markets, should definitely invest in these stocks to earn stable returns.
- The growth potential of blue chip companies is less as compared to medium and small cap companies as they have already reached the peak of their growth potential.
- Thus they come with low risk and low returns as compared to companies that have a high growth potential. If you have high risk tolerance then you can invest in medium or small cap companies.
- You can invest in blue chip stocks directly through online platforms or websites of Asset Management Companies offering those funds. You need to have a demat account for that.
- Else, you can invest through a broker or through blue chip mutual funds. Blue chip mutual funds are also known as large cap mutual funds that collect money from investors and invest those in equity or equity related instruments of blue chip companies.
- Investors with long term financial goals and moderate risk tolerance can invest in blue chip mutual funds to earn stable returns over a long period of time.
- Investors who want to earn stable returns but fear the market inconsistency, can invest in blue chip stocks.
- Blue chip companies have a solid balance sheet, stable cash flow, best business models and a history of paying regular and stable returns.
- For these reasons, blue chip stocks are generally considered the safest stock investments. Investors who have increased focus on higher interest payments should definitely consider investing in blue chip stocks.
- However, it is important to be aware of your risk appetite and financial goals before making any investments.