What is a Blue Chip Stock?

• 18 March 2017 | 1503 Views | By Mint2Save

A blue chip stock is qualified as high quality and usually high priced stock of a well-recognized, large and financially sound company that has operated for many years. These stocks have continuously shown qualities like paying generous dividends, steady or consistent earnings or increasing revenues. A blue chip stock typically endures market capitalization in the billions and gives higher returns in good market conditions. It generally represents the market leader with good reputations or amongst the top three to five companies in its sector, and is more often than not a household name. Blue chip stocks usually carry considerable lower risk than other stocks. They are generally stated as sound and safest investment.

In addition to outstanding potential for long term growth, the blue chip stocks usually display repetitive, solid earnings. Some of the examples of blue-chip stocks are General Electric (NYSE: GE) or AT&T (NYSE: T). The name blue chip stock is an indication of the highest-valued chip in a poker game The easiest set of poker chips comes in three colors, i.e.,  red, white and blue, you might have guessed, the blue chips are the highest in value.

Oliver Gingold, who worked at Dow Jones, phrases ‘Blue Chip’ in 1923. This term came into trend after Gingold as standing next to the stock ticker at a brokerage firm he noticed that number of stocks traded at $300 or more per share. He states them as ‘Blue Chip Stocks’ and wrote an article on them. That’s how this idiom was born. From that time the term has been used to refer to high-priced stocks but now it is referring to high-quality stocks. Blue chip stocks usually deliver superior returns in the long run.

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Blue chips frequently have huge profit margins than their competitors in terms of a strong branding, pricing power, and economies of scale. Blue chip companies’ balance sheets are usually gigantic and well-managed, giving them access to low-cost capital from the bond market and other sources. Blue chip stocks are typically included in the most popular stock index, like the Dow Jones Industrial Average.

Blue chip stocks are popular stocks to buy for dividends. Blue chip stocks usually give attractive dividends, a result of their financial strength and stability. Blue chip stocks have generally proven to be some of the most durable companies around and appeal especially to conservative investors that are interested in holding stocks for the long run. Even as blue chip stocks are not guaranteed to be large investments, it is a good starting place for identifying high quality businesses. Many of the top Blue chip companies in India are Reliance Industries Ltd., Tata Consultancy Services, ONGC, Infosys etc.

A few characteristics linked to Blue chip companies, although not comprehensive are that the companies having significant competitive advantages over their peers giving them the capability to do better in their markets, companies with reliable growth and good growth visibility over the future and great Quality of Management and Corporate Governance.

Aforementioned, bluechip stocks are considered relatively safest in nature due to their core business essentials, but they are relatively more expensive too when compared to the majority of other stocks. It is very necessary to make sure that an investor doesn’t blindly buy these blue chips without understanding the assessment of the business and make sure that there is sufficient margin of safety while buying these businesses. As higher the prices are paid for these blue chips, lower will be the returns and lower the valuations paid for these blue chips, higher will be the return so the returns of an investors are inversely related to it. Blue chip stocks boast an equally long record of constant dividend payments to common stock holders. Blue chip stocks enjoy high returns on capital, particularly as measured by return on equity. Bluechip stocks have a standard record of stable earning power over several decades. For the people looking for long term holding the blue chip companies are best stocks available in the market. Blue chip companies’ stocks are more suited to make profits even in bad times, hence, small investors found  keen interest in these stocks.

As we know that stock market investment is very risky but successful investors manage that risks in such a way that it will revert him good returns in the long run while preserving investment capital But investing in blue chip stocks helps to reduce this risk. Buying stocks of blue chip companies at undervalued price levels guarantee very good returns.