Blue-chip stocks explained: Why are these stocks considered safer bets?

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You might have heard the term blue-chip stocks but what exactly are these stocks?

The term blue-chip stems from poker, where the blue-coloured chip represents the highest value. These stocks are generally highly priced as they are the preferred investment options delivering consistent earnings or regular dividends.

Blue-chip stocks are the shares of a well-established company with sound financials maintained over the years. These companies are often well-recognised brands with a large market share. So, to be called a blue-chip stock, the company should be of high quality, with an ability to withstand all the ups and downs in an economy.

In India, blue-chip stocks are generally constituents of the 30-share pack of Bombay Stock Exchange (BSE) Sensex or the constituents of National Stock Exchange (NSE) Nifty. Examples include Reliance Industries, HDFC Bank, Hindustan Unilever (HUL), Bharti Airtel, and Tata Consultancy Services (TCS), which have market capitalisations in excess of Rs 20,000 crore.

These companies have a large market capitalisation and a proven record of being a leader in the industry or the sector with consistent earnings or regular dividends.

Why do people prefer to invest in blue-chip stocks?

Blue-chip stocks are generally considered to be safe investment bets as the company has a proven record of delivering consistent performance, having a sound financial structure, and have potentially offering good long-term growth prospects. These stocks may exhibit less volatility or price fluctuations in general compared to some of the other stocks, making them relatively less risky for investors.

Blue-chip stocks generally outperform the market benchmark indices in the long run. As these stocks offer stability, potential dividends, and consistent growth, they are viewed as attractive investment bets for an investor. Typically, investors look at the long-term return on these stocks than immediate short-term returns, thus it provides an opportunity for investors to diversify their portfolio, depending on their risk appetite.

How does blue-chip differ from small-cap and mid-cap stocks?

Blue-chip stocks are generally part of the large-cap and mega-cap stocks. In India, mid-cap stocks are the stocks of a company with a market capitalisation between Rs 5,000 crore to Rs 20,000 crore, and small-caps are those with a market capitalisation of less than Rs 5,000 crore. Blue chip stocks are generally less volatile, less risky, offer high liquidity (can be easily sold to get cash), and show great resilience to recover from setbacks compared to mid-cap and small-cap stocks.