As a novice investor, it is likely that you stray away from what are referred to as blue chip stocks due to a number of reasons, the biggest of which is likely the fact that they have a significantly higher market cap than small or mid cap companies that are listed on the market. As your investment pool grows, and you begin to make more profit that allows you to invest more, you start looking more towards blue chip stocks. But, what are blue chip stocks, what is a blue chip company and most importantly, how are they relevant to you as an investor? Let’s take a look.
Blue chip stocks are stocks from companies that have a long track record of being financially stable, and have a highly established reputation in their respective industries, often being industry leaders. Blue chip stocks might seem expensive, however they derive this price tag from their long history of good balance sheets and business growth.
Generally, blue chip stocks tend to be low risk. Why? Let us take a company like Infosys for example. The company has over the decades established itself as a pillar in the Indian as well as international markets. Therefore, it is unlikely that the company is going to wind up shop and disappear. This instills more faith in investors, and this results in a more sustainable price growth for the company.
The first clause in the unofficial blue chip stock definition is a high market cap and thereby, stocks that are valued at a higher price. This is a premium that one pays because it is stability and steady growth that makes blue chip stocks appealing. Blue chip stocks also have a good history of paying out regular dividends to shareholders, though this is not a necessity to qualify to be part of the blue chip stocks.
Blue chip stocks are a good addition to anyone’s portfolio, as their price is essentially linked to the markets. This doesn't, however, mean that the price for blue chip stocks will move with the market. Rather, unless the market crashes or vanishes off of the face of the earth, blue chip stocks are likely a safe bet. However, we have historically seen a number of blue chip stocks disappear over a large period of time, thus one should never make a blue chip investment blindly just because a company meets the blue chip stock definition. Instead, diversifying investments across several well established companies is a better approach and reevaluating your portfolio at regular intervals is a must. This keeps your investment portfolio up to date with what is trending in that particular market cycle.
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