We come across different investment options in our lifetime. And each investment options come forth with its own set of excitement and fear. It doesn’t come across as a surprise seeing that with each investment option, we ask ourselves and around whether it’s a safe investment or not. The same goes for blue-chip stocks. But what exactly are blue-chip stocks? We’ll discuss it here down below and find out whether it’s safe to invest in or not?
What are Blue Chip Stocks?
Blue-chip stocks refer to the large-cap shares of very well organized and large companies that have a sound history of financial performance. These companies have been around for long and have endured tough market conditions and have provided high returns over a period of time. These tend to cost high in terms of share price but have an excellent reputation with them allowing your shareholding to grow into a value with time.
The blue-chip stock companies tend to be huge companies and have been known to provide dependable earnings to their shareholders with time. These stocks often pay a good amount of dividends over time and the market leaders in their segment. They tend to have a high capitalization level of over $10 billion dollars and come with a large market share. They also have a better average return on equity (ROE), Price-to-Earnings ratio (PE) in comparison to the other stock options. The major names in blue-chip stocks are Reliance, ITC, Infosys, SBI, HDFC and more.
A peculiar point about blue-chip stocks is that they are often the top tier stocks in the market and more often than not they tend to make the most of the main stock index for any nation. Taking into the context of India, blue-chip stocks are a major marker for the Nifty index and more. Let’s take a look at different aspects of blue-chip stocks and seek whether they are safe to opt for or not.
Investing in Blue Chip Stock Companies- Twin Side of the Story
On a general note, people often have fewer qualms about investing in blue-chip stocks than the other stock options. But it’s not to say that there are no hesitations regarding the investment. As human beings, we have the tendency to seek safety for our investment and rightly so. Investing in blue-chip stocks comes with its own set of fear and myths alongside assurance and safety. We here look at the aspects of investing in blue-chip stock companies and seek the twin sides of the coin to see whether they are safe to invest or not.
- Risk factor aspect: When it comes to risk and returns blue-chip stocks are often deemed as a safe investment option. These tend to have an ingrained capacity to endure economic downturns and are not prone to volatility. They tend to be consistent in their performance helping them to cover against the inflation, economic downturns and market recessions. This makes them a safe option to opt for in terms of a risk factor than other stock options.
- Dividend return aspect: Taking about returns, blue-chip stocks tend to be the market leaders of the bunch and they have built a name for themselves over time. These tend to be the established names and they generate stable returns in the market. They have consistent annual returns which put them at the forefront of regular dividend providers to the shareholders.
- Wealth growth aspect: Blue-chip stocks tend to give minimal growth and it takes a long period of time to let it grow into a multifold stance. This is a contrasting case in comparison to the likes of small-cap and mid-cap stocks where you can quickly avail of the multi-bagger status for your stocks than the blue-chip ones. Blue-chip stocks have already commanded the market and have become one of the top players and the potential to become multi-bagger will take years down the line. You will see substantial growth in your wealth with your blue-chip stocks, but if you’re looking for multi-bagger status pretty soon, then it is not your cup of tea.
- Investment horizon aspect: When we talk about the investment horizon, it’s the period of holding onto the investment. When it comes to blue-chip stocks, these are often deemed a long term game and something that you should hold around for 5-7 years to see the impact on your wealth. There will be times when the impact will be minimal and won’t increase your fund value overnight. This is where you should prefer a calm stance towards the blue-chip funds and hold onto it for the long haul. Anyone willing for the short term impact would not find the blue-chip stock an entertaining one.
- Fundamental aspect: As we talked about above that blue-chip stocks are the stocks of large-cap companies, they tend to have a sound financial condition and credibility. These companies have been around for ages and have been the major market drivers over the years. These tend to have strong fundamentals which include aspects like revenue, profitability, profits, return on investment and others. Taking into consideration these factors, blue-chip stocks do provide a better assurance than the other options around.
How Safe it is to Invest in Blue-Chip Stocks?
Blue-chip stocks as we talked about above have better risk management and are one of those with sound financial and fundamental stance. These tend to be one of the most commendable and top-tiered stocks in the market and are likelier to provide a safety net to the investor. These move in tandem with the market and can endure tough times. This does make them predictable in nature but at the same time, they come forth with an assurance part.
Talking about the benefits offered by blue-chip stocks, the benefits outweigh the risks associated with it. But you also need to take into consideration that no one can predict the outcome and there may be times when blue-chip stocks don’t perform to the utmost as desired. It is advised that you venture into an investment based on your suitability and desire.