It is the very first question that may crop up in your mind? To be honest, you can never generalize the above statement, mainly in case of making a stock market investment since it is volatile. If you are looking for the sound and consistent returns, then investing in the blue-chip stocks may turn out to be beneficial as they are far better than the mid-caps. Even though investing in blue-chip companies are considered to be safe, still, the importance of studying fundamentals about the company and a strong research must not be neglected.
You can expect to get the best returns from the blue-chip stocks if you are well versed with the company and market. If not, then this article is for you as it will acquaint you with prominent concepts of the blue-chip companies or stocks.
What is Blue Chip Stocks?
The blue-chip stocks are essentially the shares of the large, well-established and financially stable companies that have been operating for many years. These companies quite often feature in the Fortune 500 list and popular for their quality products/services and reliability. They have a market capitalization in the billions and known to be resistant or steady even in the tough market conditions and give excellent returns in the good market conditions. Tata Consultancy Services (TCS), ITC Ltd., Hindustan Unilever Ltd, Larsen & Toubro Ltd., etc are some of the best examples of blue-chip companies.
Reasons to Invest in Blue Chip Stocks
The blue-chip stocks are known to be the darling and safe haven for the investors. For those people, who are planning to make a long-term investment with an aim to get the steady gains, it is imperative to know the prominent reasons for investing in blue-chip stocks:
Stable Earnings: If an earning of a company is stable over a period of time, then it earns the trust of the investors, which is extremely beneficial for the company. If the shares of a business or company are performing consistently well, even in the tough times, then it generally means that the top management is following the right policies to maintain the stable earnings and business reputation. If the earnings are stable, then it means you may get the good returns and that is the main goal of planning all investments.
Timely Dividend Payments: This is one of the main reasons for investing in blue-chip companies. If the dividends are consistent and timely, then it clearly means that the company is earning profits and it also means an extra income, which is nothing less than an additional cherry on the top for an investor.
Financially Sound: The blue-chip companies are known to have a strong financial base. They are not hugely burdened by the debt. They have a healthy debt to equity ratio and an excellent operating cycle. All these things create a positive sentiment about the company in the market and the stocks of the company become a popular alternative to making an investment and earning good returns.
Risk Diversification: As the blue-chip companies are highly reputed for their safety and better returns, it makes a sense to have them on your investment portfolio. These companies have a diversified business interest and multiple revenue channels. All this helps in minimizing the risk that may have cropped up because of the operational failures.
Competitive Brand Advantage: The products of most of the blue-chip companies have gone to become an integral part of the people’s life. Hence, over the years, they have gone on to earn the trust of the customers. These companies enjoy a competitive brand advantage over other emerging small or mid-cap companies. They are able to do this because their products are cost-efficient and their franchise model is quite exceptional, which has helped them to become market leaders in their respective fields. Some of the examples of the famous blue-chip companies are Procter&Gamble, Coca-Cola, Nestle, Shell, Infosys and so on.
Should You Invest in Blue Chip Companies?
There is no doubt that making an investment in the blue-chip stocks is one of the best strategies. With all the benefits these companies provide to the investors, it is also important to understand these companies are also not risk-free, but the risk is generally limited. When the markets are not performing well, then you may not be disappointed, if you invest in the blue-chip companies. However, to do this successfully, it is extremely important that you must carry out a comprehensive research work to identify the best performing blue-chip companies having great management, good growth potential and invest in them. They are a must in your portfolio along with the good mix of small and mid-cap companies’ shares to balance out the risk.