Influence of Blue-Chip Companies in Stock Market

influence of blue chip companies in stock market

‘Feeling blue’ may not work for you very well! But, feeling blue works with the stocks of blue-chip companies which are well-established and financially stable; recognized for stable stocks for making investments. The Indian stock market has over thousands of listed companies in the stock market but most of them are average performers and do not fit in the criteria of blue-chip companies. As a result, these companies are not much of influencer in the stock market. But, that’s not the case with blue-chip companies. Blue-chip companies are strong and stable enough to influence the stock market itself.

Let’s take a look to understand how blue-chip companies affect the market movement and come out as one of the influencers of the stock market.

What are the Blue-Chip Companies?

First, you need to know: where the ‘Blue-chip’ term comes from? – Well, it is a term took from the game of poker. ‘Blue-chip’ is the name given to the highest valued chips amongst all chips used in Poker.

But, blue-chip stocks don’t necessarily refer to the high-priced stocks, but more precisely the stocks of well-reputable, well-established, large and financially sound companies that generally sell or offer widely acceptable, high-end quality products or services. These blue-chip companies have proven track record of performing well in the face of adverse economic conditions and downward trends in the stock market.

How to Identify a Blue-Chip Company in Stock Market?

Okay! A company that is well-reputable, well-established, large…we get it! But, how big that company should be to call the big-chip company is still open for debate?

And, how do you find one among other publically-traded companies?

Probably, such questions may be going around in your mind right now. Well, if yes, then you are right to think it that way. Because, until you know the answer to these questions, you won’t get a clear picture of the effect of ‘Blue-chip companies’ on market movements.

Now, back to the point! Identifying blue-chip companies among thousands of listed companies on exchanges is not a simple task. But, as we defined the companies are well-reputable and recognized for its widely acceptable products gives the hint that the companies must have high market-capitalization.

So, companies that have large-capitalization such as TCS, Reliance Industries, HDFC Bank, Hindustan Unilever, Infosys, Kotak Mahindra, Bharti Airtel, ICICI Bank, ITC, etc. – are the obvious ones which are more close to being called blue-chip companies.

Now, as we mentioned that the blue-chip companies are most financially-sound companies that mean these companies have very strong fundamentals and consistent growth over the years. There is no way, all large-cap companies are financially sound. To find those that are, filter out the financially-sound companies from the large-cap companies based on Capital Annual Growth Rate (CAGR), debt-equity ratio, Return on Capital Employed (ROCE) and interest coverage ratio.

It is also said that blue-chip companies have a long track record of performing well in the stock market and have a history of giving consistent dividend payouts to their shareholders even in adverse economic situations. So, if a company is consistent with dividend payouts that means the company is profitable over the years and manage to perform well even in bad times. If you found a company one with all the above parameters in-checked then you have a blue-chip company in front of you.   

One more thing! The participation of DII and FII is a common blue-chip trait. So, while you’re at it, it is important to check this one too.

Influence of Blue-Chip Companies in Stock Market Movement

To better understand the influence of blue-chip companies in the stock market movement, let’s take an example of Nifty50.

Nifty50 is the benchmark broad-based index for the Indian equity market which usually refers to a group of 50 large-cap companies on the National Stock Exchange. These large-cap companies are often called by blue-chip companies which hold around50-60 per cent weightage in overall Indian market reserve and reflects overall market conditions heavily.

Below, we’ve mentioned the weightage of top constituents in the movement of the overall stock market.

Stock Name Weightage (in %)
HDFC Bank Ltd 10.70
Reliance Industries Ltd 9.51
Housing Development Finance Corporation 8.29
Infosys Ltd 6.89
ICICI Bank Ltd 5.88
Tata Consultancy Services Ltd. 5.28
ITC Ltd 4.69
Kotak Mahindra Bank Ltd 4.26
L&T 3.65
Axis Bank 3.02

Reference: https://indiancompanies.in/nifty-50-companies-stock-weightage-constituents/

As you can see in the above table, these blue-chip companies hold very high weightage in the overall movement of the equity market so any changes in a company’s business & operations can highly influence the overall market movement. If a company have a good quarterly result then the individual stock can lift the overall sentiment of the market and vice-versa.

And any bad news makes it capable of left the market in a downward trend.

Final Thoughts: –

Undoubtedly, blue-chip companies are more than capable enough to influence the overall movement of the market. But, the companies stability and consistent performance throughout the years made them the first choice of investment to safeguard their capital from market volatility. It has often seen that even in economic slowdowns, the blue-chip stocks are the first to recovered and lift the overall market sentiment.

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