What are blue chip companies?
A blue chip (or blue-chip or bluechip) stock or a blue chip company is a persistently recurring term in stock market jargon. Let’s look into what it actually means.
Why “blue chip”?
The story behind the moniker “blue chip” goes like this. In keeping with the high risk and volatile essence of stock-picking, the term blue chip was derived from poker. The blue chip in poker represents the highest value. In the United States, around the 19th century, the term blue chip was associated with high-value property. This established connotation extended to a blue chip stock in the 1920s.
The origin of this term can be traced back to a Dow Jones reporter. According to some, this was first coined by a certain Oliver Gingold (an early reporter employee of the company that would later be called Dow Jones) Once, when Gingold was standing by the stock ticker, noticing several trades at 200$ or $250 a share or more, he said to his colleague that he intended to return to office to “write about the blue chip stocks”. The investment community has employed it in stock market terminology ever since, originally using it as a label for high priced stocks, and eventually using it to refer to high-quality stocks that have withstood the test of time.
What are blue chip companies?
A blue chip company, therefore, is a large, established, stable and high-quality company. They are stalwarts of the industry they engage in – secure, and financially sound companies that have seen and weathered several economic cycles. They are viewed as relatively low volatile investments as their size and market dominance allow them to sustain poor growth phases, secure better funding, and reach bigger markets.
Reliance Industries, ITC, Hindustan Unilever, Tata Consultancy Services are all examples of mature, quality companies operating in different industries. They are each cited by investors as a blue chip company. Blue chip companies like these are mature companies in the stock market.
Apart from the above, blue chips are also distinctly characterized by their extremely large market capitalization. Market capitalization is simply the number of shares in a company multiplied by its market price. Market capitalization of blue chip companies usually runs in several lakh crores. Mentioned below are ten of the many blue chips in India along with their market capitalization.
|S.no||Companies||Market capitalization (Rs in cr)|
|1||Tata Consultancy Services||₹ 7,94,173.00|
|2||Reliance Industries||₹ 8,05,721.00|
|6||Coal India||₹ 1,03,996.00|
|7||Sun Pharma||₹ 96,189.00|
|9||State Bank of India||₹ 2,41,411.00|
|10||ICICI Bank||₹ 3,14,770.00|
Blue chip companies are usually dominant players in their sector and more often than not, their products and/or services tend to be familiar household names. While dividend payments aren’t absolutely essential for a stock to be considered to be a blue chip, most do have long records of paying stable or rising dividends. Because they are more able to pull through turbulent economic conditions, they have a steady growth rate and are subject to less volatility.
These are reasons blue chip companies are seen as relatively safer investments. Smaller companies are able to post a higher growth rate in revenues and earnings as they have new markets to tap into and new products to introduce unlike already established companies. However, they are more vulnerable if capital dries up or economic conditions are weak. Therefore, they are more volatile than blue chip companies.
However, how big a company has to be to qualify as a blue chip is open to debate. This apart, a blue chip company is not infallible. The collapse of mammoth companies like Lehman brothers, Enron amongst others serves proof of this fact. So blue chip companies are not as high risk as small-cap or mid-cap companies but they still do hold risk.
How does one keep track of blue chips’ prices?
So how do you know which is a blue chip company? How do you track performance of such companies? Simply look towards blue chip market indices. An index is a basket of stocks, chosen and weighted on different metrics. The index level changes as the underlying stocks’ prices change. An index, therefore, will give you a fair idea of what has changed in the market and how blue chips stocks’ prices have fared.
There are indices of many sorts. But for the purpose of this article, let’s just look at two main indices as examples of indices that focuses on large cap (i.e. blue chip) companies. These two indices are the bellwether indices of Indian stock markets and these index levels are looked at to gauge how well Indian markets have performed.
- NSE’s Nifty 50 – The Nifty 50 is the flagship index on the National Stock Exchange of India Ltd. (NSE). The index tracks the behaviour of the 50 largest and most liquid Indian securities. It captures approximately 65% of the NSE-listed companies’ float-adjusted market capitalization and is a true reflection of the Indian stock market. The index has been trading since April 1996. The Nifty 50 is computed using free float market capitalization weighted method.
- BSE’s Sensex – S&P BSE Sensex is the oldest Indian market index and was first compiled in 1986. The Sensex consists of 30 stocks representing large, well-established and financially sound companies across key sectors. Since September 1, 2003, S&P BSE SENSEX is being calculated on a free-float market capitalization methodology.
Apart from these, there are other indices that represent large-cap stocks, such as the Nifty Next 50, the Nifty 100, the BSE 100 and the BSE Sensex 50.
(Note :- Free float market capitalization method – each stock in the index is weighted in proportion to their market cap excluding those of the promoter group, i.e. it includes only that part of the shareholding that is available for trading)
Should you invest in blue chips?
Anyone looking to invest in the stock market can easily make blue chip companies as a part of their portfolio. Since their growth rate is usually stable as the company reaches the mature phase of the business cycle (unless they innovate and re-invent themselves as time passes to avoid becoming obsolete), blue chip suit most long-term investors. Following are some reasons why blue chips should be a part of any long-term portfolio
- Lower volatility by virtue of their size and ability to manage different economic cycles.
- Reasonable dividends.
- Sound financial standing, and able to raise capital when needed for expansion
- High brand value & trust
- Shares of blue chip companies are traded frequently and provides high liquidity
- Almost all blue chip companies are top-tier companies in their respective fields – this attests to their adherence to a high standard of products and services over the years, ensuring their position in the market and erasing any possibility of them being dispelled from the scene.
However, ensure that blue chip companies don’t end up constituting the entirety of your portfolio if you have an investment period of 7 years and above and if you have a high risk appetite. It can be held as part of the core holdings of a portfolio, but allocate investments to other investments as well. Why?
Because of the concept of risk and return. There is no such thing as a safe option in the investment world. So, parking all or a significant amount of your hard-earned money in just one or a couple of investments is never a good idea because of how tenuous everything is in the investment world. Portfolios that have concentrated exclusively in certain areas are bound to suffer some deterioration. Older investors for whom capital preservation is important should especially look to bonds and other fixed-income options more than blue chip stocks.
Also, there is the concept of higher returns for more risk. While large-cap stocks are stable, mid-cap and small-cap stocks can offer high returns. Younger investors can generally tolerate such risk as their holding period is longer and they are still in their earnings years, making them able to absorb volatility.
So it is absolutely essential that portfolios be created in accordance with the risk profile of the investor. Blue chip companies’ stocks should be taken only if one has the capacity to bear any unanticipated loss big or small.
How can you invest in blue chip companies?
Exposure to blue chip company shares is not too complicated to obtain. There are essentially 2 ways that this can be performed.
Directly buying shares of the company by setting up need a demat and trading account through a stock market broker. This process is simple and will require you to submit some documentary proof. Once this is set up, you can begin trading in stocks. Brokers will charge a brokerage fee for the trading services they provide, which varies with each broker.
When buying stocks directly, you will need to identify stocks to buy and will also need to know when you should be selling them. Therefore, it should be noted that the act of directly investing in the market isn’t everyone’s cup of tea. To invest in stocks directly, you will need adequate knowledge of the nuances of the market, the interplay between company performance, the domestic and global economy, and time to spend on researching stocks.
If these do not seem like something that you could do, then neither is directly trading in stocks. Therefore, if this isn’t what you prefer, you will need to look for other options. One option is to get your own portfolio manager who will invest exclusively for you keeping in mind your risk profile, but it is patently more expensive. This route is also not open to every investor and is restricted to high net worth individuals and come with very high minimum investment thresholds. Therefore, the more accessible option is to go for equity mutual funds.
Investing in equity mutual funds that have a strategy of investing in blue chip companies or large cap stocks will give you exposure to large stocks without having to do any homework. A mutual fund is a pool of individual investors’ savings that is deployed into different investments. A large-cap equity fund, therefore, will invest at least 80% of its portfolio in large-cap stocks. The decision on where to invest is made by a fund manager who is a market expert, backed by a research team.
The benefits of a mutual fund are that you have a market expert deciding which stocks are good, you are able to hold a wide variety of stocks, costs are low, and you are able to build wealth through equity without needing to understand markets or spending time researching. Each mutual fund scheme has its objective stated upfront which determines whether it is conservative or aggressive in its style of fund management. If its objective aligns with your personal investment objectives, then it’s a good investment avenue to consider.
The performance of mutual funds is widely tracked and is available daily. Portfolio details on fund size, stocks that make up its portfolio and so on are published on a monthly basis. The performance of a mutual fund scheme is available daily in the public domain. Mutual funds are regulated by the capital market regulator Securities and Exchange Board of India (SEBI).
You do not need a demat or trading account to invest in equity funds, you can do it directly with the fund house. You also have online platforms through which you can invest. You can also go through offline distributors. You will need to submit KYC documentation. You can invest either through a lump-sum at one time or through smaller amounts periodically called SIP.
Some examples of large, established, large-cap equity mutual funds are –
- Axis Blue Chip, managed by Axis Asset Management Company.
- ICICI Prudential Blue Chip, managed by ICICI Prudential Asset Management Company
- Mirae Asset Large Cap, managed by Mirae Asset Investment Managers (India) Private Limited.
- Nippon India Large Cap, managed by Nippon Life India Asset Management Limited.
It is however recommended that whatever route of investment you choose, you take note of it at regular intervals and assess whether your financial goals are being met.