The stocks that are of high quality, the companies which are established, big, renowned, and are in the market for decades are called blue chip stocks. Blue chip stocks got their name from the poker game. In a poker game, there are three colored chips white chips (valued at $1), red chips (valued at $5), and blue chips (valued at $10). Blue chip is an analogy that is used for identifying the “most valued stock”.
What factors make a stock/company “blue chip”?
There is a combination of factors that transform a stock into a blue-chip stock means the stocks
Which has the largest market share
Is highly valued.
Has strong financial standing.
Pays regular and high dividend.
The company is large and established one.
Strong and known brand name.
Which has high weight-age in main stock indices etc.
Blue chip companies have the largest market share
Every company operates in a specific sector or industry and there can be many companies operating in similar sector/industry. There are companies that operate in several sectors but each company has a core operating sector. When we say a large market share, it means a large market share within that sector or industry. Large market share can be identified by the sales turnover of the company within that sector. You can also look for market capitalization of the company.
Why one should invest in blue-chip stocks/companies?
It is noted that first choice people make for their long term investment is for the blue-chip company. It is because the returns generated by blue-chip shares/companies are more assured in the long term. The reason being they yield consistent dividends, their future growth is more certain and during difficult times their stock price is more or less stable.
Investors like blue-chip stocks because they are consistent and high dividend yielding stock. Since these blue chip companies have a dominant market position and strong fundamentals which gives them the pricing power. Even in the bad times, their stock value does fall with the indices, but the price falling is slower, and recovery is faster.
How to identify blue chip stocks?
Apart from largest market share and highly valued in the market, there are few other factors one should look into are a strong balance sheet, highly profitable, high dividend payouts, and good investment credit ratings. More or less they are monopoly players in their segment.
All businesses are risky and have up and down cycle. What is blue chip today may not continue for a lifetime, but the probability of risk (being non-blue chip) is less for a decade or so. So it is better that once in a while keep on checking their credit risk, in case it is downgraded there will be a bad impact on its market price and so on your returns.
Companies that are blue chip today
Here is a list of few companies that are blue chip today (as on writing this article) taking into account few factors like high absolute returns since last three years, high market capitalization, high dividend yield, credit rating, and low beta. They are TCS, Hindustan Zinc, Reliance Industries, ONGC, SBI, Hindustan Unilever, Coal India, Infosys, and GAIL (India) etc.
In case you want to know blue chip stocks in particular industry/sector which you feel will be a future growing sector you can contact us and we will be glad to help you. You can also fill the free trial form available on our site and submit it.