What are Blue Chip Stocks?

Blue-chip stocks are highly valued stocks belonging to companies that maintain a sound record of financial stability and credibility for numerous years.

What are blue-chip stocks

These stocks are known for their ability to withstand adverse market conditions and yield high returns in favourable market conditions. Mostly, companies with blue-chip stocks are not only premium but also dominant in their industry. They are enlisted among the best organisations in their respective sector. Most of the times, a blue-chip stock has records of yielding consistent dividends to its investors over the long run.  

What makes blue-chip stocks a good investment?

Specific parameters qualify a company to be termed blue-chip. Blue-chip stocks are stocks of established companies. Most of these stocks generate stable returns for investors. Because of this consistency, investors are protected from market recessions, inflation, and economic downturns. These companies register consistent annual returns over extended periods with a stable debt-to-equity ratio.

The average return on equity (ROE), Price-to-Earnings ratio (PE) and the interest coverage ratio of blue-chip companies record a steady performance. As blue-chip companies offer regular dividends to the shareholders, it helps them earn a regular income. Strong financial position, a great balance sheet, stable growth rate, and the best managerial team are some of the traits of a blue-chip company that makes their stocks a worthy investment.  

Who should invest in blue-chip stocks?

Blue-chip stocks are synonymous with fewer debts, consistent dividends/returns and goodwill of the company. Such stocks are not only safe but also help investors in mitigating risks. A company with diversified operations won’t see much fluctuation in its stock price, even if its financial performance is not up to the mark for a few months or a year. Here, we assume that the company will cover the losses of one business function from its other business areas.    

ClearTax can help you better understand the risks and return of investing in Blue-chip stocks.   In the presence of superior operational efficiency of companies, placing a bet on blue-chip stocks can further reduce the chances of heavy losses. These stocks are favourites among affluent investors who are experienced in making worthy investments.    

Risk and returns

Blue-chip stocks are considered safe investment options as they can endure economic downturns and are not highly volatile. They also present a slow but moderate growth potential. These are typically dividend-paying stocks where the payment is made quarterly. It is advisable to diversify your portfolio when investing in individual stocks, to avoid company risk.  

Investment horizon

Most blue-chip stocks usually have a long-term investment prospect spanning over seven-plus years.      

Tax on gains

Short-term capital gains are subject to the 15% tax bracket while the long-term capital gains that had been tax-free thus far are subject to taxation. As per the Union Budget 2018, long-term capital gains in excess of Rs 1 lakh are now subject to a tax net of 10%.  

Financial goals

Blue-chip stocks are ideal for investors seeking to reap the benefits of getting high returns on capital and generating regular periodic income. These make for excellent retirement savings as these stocks are highly-valued, excellent long-term investment options. The uninterrupted dividend payments make for steady portfolio income over time.  

These stocks may not be best suited for the smaller investor owing to the higher price per share, increased focus on dividend payments and higher downside risk as against a small upside potential. It is essential to be aware of your risk tolerance and financial profile before making any investments. Still unsure about whether to invest in blue-chip stocks?? ClearTax is here to help you make sound investment decisions.