Why invest in blue chip stocks

Authored by
Team Espresso
October 12 2022
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2 min read
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Blue chip stocks are shares of well-known, large companies with long-standing reputations and solid financial health, usually among market leaders in the sector. The term is believed to have been originally used to refer to the highest-priced stocks in the market, much like blue chips in the game of Poker that hold the highest value. However, now blue chips usually refer to high-quality shares that provide stable returns to investors. 

Let’s look at a few characteristics of blue chip companies that make them investors' favourites.

Credibility: Blue chip companies are large corporates with big capital bases and huge market capitalisations. These companies usually have stable cash flows that either help them operate without raising debt or service their debt obligations within stipulated timelines, adding to their creditworthiness.

Steady earnings: These blue chip stocks regularly give dividends to shareholders. Some blue-chip companies pay out dividends even every quarter making them the best bet as part of long-term investors' portfolios. 

Relatively less risky: The risks associated with their financial performance are next to nil for these big companies. This is because the companies cater to a larger market through quality products and services. This helps them perform well even during market downturns. In fact, these companies may even continue to grow and profit during economically adverse times, thanks to their strong financials and wide market reach. However, this is not to say there haven't been cases of large companies failing. So doing your due diligence before investing is still important. 

Now that we know the key characteristics of blue chip companies, we can dive into the reasons for investing in blue chip stocks. If the investment goal of the investor is steady returns and minimum risk, investment in blue chip stocks is the way to go. Blue chip stocks are typically insulated from market volatility and are a good bet against inflation, recessions and economic stagnation. Though blue chip companies, too, can suffer losses when the broader market turns heavily bearish or economic downturns become long and steep, these companies are less volatile. and tend to bounce back faster when the market recovers. Since they are low-risk investments, they should ideally be a part of your diversified portfolio. For long-term goals, blue chip stocks are fit choices to ensure corpus building as the returns from blue chips increase gradually over time. 

And finally, due to their market credibility and goodwill, these stocks are highly liquid — there are enough buyers and sellers at any point in time — and they can be traded in the market easily.

Reliance Industries, Tata Consultancy Services, Hindustan Unilever., Infosys, and HDFC are some of the top blue-chip companies in India.




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