Why invest in Blue-Chip stocks?

Introduction

Not all stock market investors are high-risk takers. For such investors, experts often suggest investing in blue-chip stocks. Even if you are a high-risk taker, you should consider adding blue-chip stocks to your portfolio for stable returns. However, what exactly are blue-chip stocks?

Understanding Blue-Chip stocks

Blue-chip stocks are stocks of companies that are financially healthy, have stability, and have a solid reputation in the market. Blue-chip stocks is an alternate term for stocks of large-cap companies. In India, the Securities and Exchange Board of India categorises the top 100 companies by market capitalisation as large-cap companies.

These companies are well-established and characterised by large capital and reliability. Such companies are able to weather financial storms and turbulence in the market, giving stable returns despite market volatility. As an investor, you can expect your investment in blue-chip companies to remain fairly stable and even grow in the long term.

what are blue chip stocks

What does Blue-Chip mean?

The term “blue-chip” comes from the game of poker. In poker, among the blue, red, and white chips, blue chips have the highest value. Since large-cap companies are the most valuable among small-cap, mid-cap, and large-cap companies, they are called blue-chip stocks.

Blue-chip stocks do not necessarily trade at high prices or multiples. Instead, these are companies that have stability, a strong balance sheet, great quality, and a good reputation in the market. This, in turn, elevates their value among investors, making them highly liquid and eventual market leaders in their industries. Generally, you can expect blue-chip stocks to give good returns on equity and their assets.

Characteristics of Blue-Chip stocks

• Blue-chip stocks are high-quality stocks characterised by low volatility compared to mid cap and small cap stocks.
• Usually, blue-chip stocks often pay dividends to their shareholders.
• These stocks have strong fundamentals that make them less susceptible to wild stock-market fluctuations. While they may face a temporary pitfall during market downturns, they are able to withstand the tough times because of their strong balance sheets.
• They have high liquidity because of their reputation. Both individuals and institutional investors trade these stocks frequently.

Why you should invest in Blue-Chip stocks?

Now that you understand what blue-chip stocks are and what characterises them, here’s a case for why you should include these stocks in your portfolio:

For stability

Blue-chip stocks are stable investments that do not fluctuate wildly even during the most turbulent market conditions. If you are an investor who worries about losing money during market downfalls, then you should definitely invest in blue-chip stocks or large-cap companies. These stocks are also a great option for new investors because of the low volatility compared to mid cap and small cap stocks.

Liquidity

Stocks of large-cap companies or blue-chip stocks are highly liquid, meaning they have a ready market in case you want to sell your investment. Blue-chip stocks are sought-after stocks in the market. You will never find it difficult to find buyers for your stocks if you want to sell in case of an emergency or any other pressing situation.

Portfolio diversification

Even if you are an investor with a high-risk appetite, you should consider including blue-chip stocks in your portfolio. These stocks help you to diversify your investments.

Meet long-term goals

Since blue-chip stocks are relatively stable and often provide regular dividends, they can help you meet your long-term financial goals with ease. You can make a fair estimation of how the prices of these stocks will move in the long term. Using this estimation, you can plan your financial goals. You can add blue-chip stocks to a trust fund, a retirement fund, or for planning for your child’s education.

How to include Blue-Chip stocks in your portfolio?

Blue-chip stocks can provide stability and regular returns to your portfolio. How much of these stocks you should include in your portfolio comes down to your risk appetite and financial goals?

If you have a low-risk appetite, then a majority of your stock investments can be in blue-chip companies. You can also choose to invest in blue-chip mutual funds for optimal diversification.

Additional read: What are large cap Mutual Funds?

As a medium risk-taker, about 50%-60% of your stock portfolio can consist of blue-chip stocks. The remaining portion of your portfolio can consist of mid cap and small cap stocks. Even if those stocks show high volatility, your blue-chip stocks help you to absorb some volatility from your stock portfolio.

As a high-risk taker, you should still include a small portion of blue-chip stocks in your portfolio. This could be 10%-20% of your stock investments.

Conclusion

Blue-chip stocks are the crème de la crème of stocks in the market. They are high-quality, have a good reputation, provide easy liquidity and have strong fundamentals. These stocks can also be an excellent choice for novice investors because of these attributes. Even risk-takers can include blue-chip stocks in their portfolio for diversification.