0 What are bluechip Stocks? Why Should You Invest in Them? - Trend Guru

What are bluechip Stocks? Why Should You Invest in Them?

INTRODUCTION

You must have known about Blue-Chip stocks during your investment quest in share markets. These are amongst the most preferred option for multiple stock market investors over the recent few years despite their high prices. Blue Chip stocks are the stocks of some of the highly esteemed organizations listed on the stock exchanges. These organizations are very reliable and have very rationalized financial and credibility. Since the organizations are sound and in profits, there are great chances of dividend pay-outs with Blue Chip stocks which can be one of the main reasons for the vogue of Blue-Chip Stocks.

It is frequently misinterpreted that a stock that has a very increased value will be a Blue-Chip stock, but that’s not always accurate. Blue-Chip stocks are the stocks of high-quality revenue companies. These organizations are nationally acknowledged, financially sound, and well-established.

Blue-chip stocks are highly priced market stocks, which have ensued as a preferred investment choice over recent years. The organizations that issue blue-chip stocks are highly respected in the stock exchange market and tend to have a reliable financial record and credibility. Besides their repute, the fact such organizations extend outstanding dividend pay-outs can be credited for the thriving popularity of the said stock.

Still, before investing in blue-chip corporations, individuals should prepare them with a few vital details.



WHAT ARE BLUE-CHIP STOCKS?

Stocks that are allocated by blue-chip organizations, i.e. organizations with a large market capitalization are termed as blue-chip organizations. Firms that issue these shares are well-established and enjoy incredible market repute; thus, the shares issued by them are highly valued in the market. Individuals can invest in Blue-chip stocks in India either promptly or through Mutual Funds.

The definition of blue-chip stocks varies, but commonly, the well-established corporations which have huge market capitalizations and indicated their financial performance in providing constant dividends in both upward and downward trends are blue-chip organizations. Now, Truth be told, there is no specific definition of blue-chip stock.

CHARACTERISTICS OF BLUE-CHIP STOCKS

The characteristics of Blue-chip stocks are enlisted below –

  • Assured returns:

Blue-chip stocks develops returns quarterly in the form of dividends. The fact that well-established organizations also assist as a prudent investment avenue for most investors. With this safety comes the proof of earning steady but inevitable returns.

  • Creditworthiness:

Blue-chip organizations have enough money to clear their financial dues and responsibilities easily. This, in turn, makes the shares issued by such corporations high in creditworthiness.

  • Risk factor:

Since big firms with reliable financial performance issue these stocks, the risks factor related to blue-chip organizations are comparatively less. Investors can further decrease the burden of risk related to blue-chip shares by modifying their investment portfolio.

  • Investment horizon:

The term of investment is usually over -6 years. Such long term makes Blue-chip desirable for achieving long-term financial objectives owing to its high investment horizon.

  • Growth prospect:

Blue-chip corporations are those large corporations that have reached their absolute growth potential. This impacts the Blue-chip shares that undergo stagnant but steady expansion over time.

  • Taxation:

The gains developed through blue-chip shares in India are regaled as income under Section 80 C of the Income Tax Act. The short-term capital earnings are subjected to taxation at the rate of 15%. Still, the long-term capital earnings exceeding Rs. 1 Lakh are liable to taxation at the rate of 10%.

MOTIVES TO INVEST IN BLUE-CHIP STOCKS

  • Blue-chip stocks in India are deemed to be a highly desirable investment choice for achieving long-term financial objectives.
  • Here are a few motives to invest in Blue-chip shares –
  • It gives higher returns that are paid quarterly.
  • Enables corpus building.
  • Stimulates portfolio diversification.
  • Cushions the influence of the recession, inflation, and economic stagnation.
  • Still, owing to their higher price, blue-chip shares may not be desirable for small investors.

MAJOR ADVANTAGES OF INVESTING IN BLUE-CHIP STOCKS

The powerful financial standing, excellent market valuation and credit worthiness of blue-chip stocks act in service of their investors and extend many advantages to them.

Blue-chip stocks investors would use the following advantages –

  • Reliable and regular dividends:

Irrespective of the market situations, blue-chip stock investors avail reliable returns on their investments. Such returns are developed in the form of divided which are extended to them quarterly.

  • Opportunity to accomplish financial objectives:

Being a long-term investment choice that comes with an investment duration of over 7 years. It provides investors sufficient time to build a strong corpus over the years for their respective financial objectives.

  • Advantage of portfolio diversification:

Blue-stock organizations are high-profile business companies that do not produce earnings from just one channel. It not only enables them to cushion their losses against operational difficulties but moreover enables their investors to spread out the associated risks of blue-stock shares.

  • Liquidity:

Blue-chip firms rejoice in market goodwill and high creditworthiness. It promptly strengthens the market value of blue-chip stocks and makes them a desirable investment choice for investors. This promptly promotes the purchase and sale of such stocks making the liquid in nature.



ALTERNATIVE INVESTMENT OPTIONS

Owing to their market goodwill and credibility, blue-chip shares in India come with a low-risk component. The low-risk burden moreover makes them desirable for risk-averse and conservative investors. Still, investors who wish to earn greater returns with limited exposure to market risks can opt for these alternative investment alternatives –

Real estate

Even though the advancement of the real estate market in India has mellowed out a little, it is however one of the most successful investment avenues in the county. Investors can buy, rent or sell residential and commercial properties and develop earnings in due course.

Exchange-Traded Funds

ETFs are a compilation of securities that are traded on exchanges that are assessed as a low-risk investment alternative. ETFs frequently comprise stocks, bonds, commodities, and different investment instruments and come with a low expense ratio and lower related expenses. As per their needs, investors can invest in Gold ETFs, Liquid ETFs, International ETDs, or Bank ETFs.

Fixed deposits

Investors who like to develop returns and tax benefits on the same can invest in fixed deposit schemes rather than blue-cap stocks. Banking on their requirement, investors can park their wealth in fixed deposits for both the long-term and short term. FDs moreover enables investors to avail of a loan against it in case of a crisis.

Government bonds

Government bonds are low-risk investment alternatives that are issued by the government of India and regulated by the RBI. Such bonds extend fixed interest to their investors and enable them a likelihood to diversify their investment portfolio. Besides, government bonds extend tax advantages to investors and provide liquidity.

Blue-chip stocks in India are a desirable investment choice for individuals who like to produce steady returns over a long duration. Still, investors can always explore different investment avenues and strengthen the profitability of their investment portfolios. Also, they must realize the necessity to prioritize their financial objectives, income, and risk appetite before investing in any investment alternative.

CATEGORIES OF BLUE-CHIP STOCKS

The blue-chip stocks can be categorized into the below classifications:

  • Growth Stock:

Growth stocks are stocks of blue-chip corporations that have high earnings which reinvested in the organization’s business growth. Commonly, these corporations pay fewer revenues to common shareholders still it doesn’t matter to the investor since the company is prospering.

  • Value Stock:

Value stocks are stocks of blue-chip corporations that are undervalued in the market but understood as a potential stocks. The real worth of such blue-chip organizations is much greater than the current stock price.

  • Cyclical Stock:

Cyclical stocks are stocks of blue-chip organizations whose stock price value pivots upon the all-around health of the economy. If the economy is rising then the stock price will gain in value but if the economy is plummeting, then the stock price will reduce in value.

  • Income Stock:

Income stocks are stocks of well-established blue-chip organizations which pay huge dividends to their investors. The stocks of such organizations are less erratic in the market. Commonly, these organizations give a bonus and partake in buybacks.

WHY SHOULD YOU INVEST IN BLUE-CHIP STOCKS?

  • Blue-chip stocks are one of the most preferred classifications by investors. Some of the bases, which make them a preferred option include:
  • They give quarterly payouts in the form of demand which makes the all-around return to be high.
  • The high returns help in creating sufficient corpus for your financial objectives.
  • hey are a very critical asset class for portfolio diversification.
  • They are usually invulnerable to the impacts of economic stagnation and different similar characteristics.

HOW TO SPOT BLUE CHIP STOCKS IN THE STOCK MARKET?

Comprehending the blue-chip stocks is not a reasonable task, provided that there are around 6000 organizations are listed on domestic stock exchanges so far. To shortlist the blue-chip stock that appeared out of thousands and to do blue-chip the investment would expect to look out for specific things which are as follows:

Check for Market-Cap

The very main thing to recognize the blue-chip stocks is to search for the market capitalization of organizations. As per SEBI, the early 100-200 organizations, in terms of market capitalization are large-cap stocks. As the name indicates, these organizations are well-established and have very huge market capitalizations. These organizations have a powerful market presence and are recognized for providing constant financial performance over the years.

Check for CAGR

In identifying the blue-chip organizations, One of the critical main indicators is to check for the company’s CAGR (Compounded Annual Growth Rate)as the consistency in the growth of the earnings pushes the all-around advancement of the organization, in addition to the debt-equity ratio, return on capital utilized, and interest coverage ratio, etc.

Dividend Payments

It is said that blue-chip firms have a long history of paying uniform dividends to their investors. So, one thing one needs to observe in the search for blue-chip stocks is the list of stocks or organizations that have a very long track record of paying uninterrupted dividend payments. We believe it is a promising reflection of an organization’s profitable business over the years and the management’s behavior towards common shareholders in sharing revenues.

As the saying goes, you will discover a list of organizations that have a long track record of paying uniform dividends to their minor shareholders.

Conclusion

Blue-Chip stocks may have various benefits, but it must be noted that the capital requirement for investing in them is huge owing to the high expenses, thus they not be reasonable for new or small investors. Therefore, it is very significant to pick the best investment alternative for you which is based on several factors. An investment advisor can assist you in selecting the best investment alternative as per your requirements.

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