Blue-chip shares are considered reliable investments. The origin of “blue chip” traces to the game of poker. It has different kinds of chips where the blue chips hold the highest value.Blue-chip, therefore, represents high-value stocks. Those with a sound financial background, proven track record,and excellent managementare resilient even in adverse economic conditions.
Before you consider investing in them through the best Indian Stock Market app, checkthese aspects:
Blue chips exhibit the following traits
Financially strong
Blue-chip companies exhibit a strong financial position and are fundamentally sound. They have a strong balance sheet, enjoy excellentprofitability, and consistently generate cash from operations.These companies are debt-free, have substantial reserves,and robust cash flows to finance their expansion and working capital requirements.
Leadership position
These companies belong to the top rung and are leaders of their respective sectors, if not the top five within the industry. Maruti in the four-wheeler auto sector, while Bajaj Auto, Hero MotoCorp, in the two-wheeler segment, are leaders in their segments.
Large scale operations
These companies have a business built over time and have established themselves as a large company with huge market share and brand value. For example, Hindustan Unilever, Marico, ITC, Nestle, etc., are a few fast-moving consumer goods companiesthat fall in this category.
Strong management
It is not easy to build businesses and grow andmanage such a size and scale. Generally, the blue-chip management team demonstrates such abilities to drive scale and growth.
Advantages
Shareholder friendly
Blue-chipcompanies reward theirshareholders with consistent dividends and other shareholder benefits like bonuses, etc. These companies distribute profits than ploughing back the same for growth. Most Indian blue-chip companies like HUL, ITC, Bajaj Auto, HDFC Bank, TCS, Infosys, and such have been very shareholder-friendly concerningdividends, buybacks, and bonuses.
Low volatility and stable earnings
The company earnings are stable and steady, and devoid of spikes and, therefore, less prone to volatility. Precisely whythey are preferred in the portfolio.
Diversified business
This implies risk gets distributed, and the impact of any setback is minimal. Blue chips either diversify within their segment or out of their segment. Reliance Industries is an example of diversification with business interest across Oil, Retail, and telecom. Hindustan Unilever is diversified within the segments and has a presence in soaps & detergents, and food. ITC is another example of the cigarettes, food, and hotel business.
Resilience tobounce back
Systematic risks affect the entire market. These factors are beyond anybody’s control, like war, depression, and other macroeconomic factors. However, the ability to bounce back from a downturn differentiates a leader from the herd. Also, being the pack leader, they enjoy mass appeal, too, contributing to quick revival from adversity.
Limitations
Moderate growth
These companies have reached a level where the growth from the current point is moderate and not high. While it provides stability to the portfolio, the returns are average. Therefore, it is opted by people with a low-risk appetite over a moderate to high-risk appetite investor.
Notrading bets
These areunsuitable for trading bets as the volatility is low and the return. They are long haul stocks where capital appreciation is moderate to slow.
Not an out-performer
Blue-chips are not known to be index out-performers. Hence, you always find them on your best Share Trading app on the top.
Slips are dangerous
The primary restriction is that markets can be unforgiving if the blue chip does not meet the investor’s expectations. So, choose your blue-chip with much care.
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