Blue chip companies are typically seen as the foundation of any economy. They are the companies that everyone wants to work for and be associated with because they represent success and stability.
Even if they are not the best company in their industry, blue chips are usually considered winners because of their ability to survive in volatile markets.
In this post, you will learn about
- What are blue chip stocks?
- What qualifies a company as a blue chip stock?
- Why invest in blue chip stocks?
- Examples of blue chip stocks
What are Blue Chip Stocks?
The term “blue chip” is derived from the game “Poker” which represents the highest value pieces in the game. In the same sense, blue chip are the companies that have a large market cap and a tremendous reputation in the market industry.
A blue chip stock is a very large company that has been in operation for a long period. It has usually considered stable with strong earnings and a strong track record of success. They typically have a large market capitalization and excellent profitability.
Blue chips are typically conglomerates or diversified companies that have many operations that they can use to buoy the company if one of the sinks. A blue chip stock can be traded on any exchange, but they are most often traded on the New York Stock Exchange.
There is no formal definition for blue chips, but they are generally considered to be corporations with an established record of success, solid financial performance, and high-quality management teams.
These companies are known to be valuable, stable, and established. They were generally big names, more often household names. The investments information supplied in this section is only meant in education.
What Qualifies a Company as Blue Chip?
The main difference between blue chip stocks is that they are large cap stocks. These are the stocks of the companies that are considered to be stable and less volatile investments.
Normal stocks or small-cap stocks are the stocks of companies that are smaller and considered speculative investments.
Seven Traits of High-Quality Blue Chip Companies
High-quality blue chip companies have a few things in common, which make them stand out from other organizations. These traits include:
- Respect for Individuals - High-quality blue chip companies value people as individuals, not just as an employee or customers. They are fair yet tough when necessary, and they always treat everyone with dignity and respect.
- Committed to Innovation - High-quality blue chip companies are always trying new things, even if it means failing at first. They are committed to unleashing the full potential of every person within their organization by fostering creativity and innovation in all aspects of work life.
- Focused on Customers - Generally, the blue chip stocks are consumer-focused. A report of Economic times mentioned how Indra Nooyi changes the oil in the production of chips to heart-healthy oil, which cost a lot of money for the company. This shows how blue chips companies are consumer-centric.
- Strong brand image - Blue chip stocks have a strong brand image in the industry as Google has in the search engine space. These companies can spend millions of dollars just to maintain their brand image.
- Well-organized and capitalized - These companies are well-organized because they know the cost of every second. These companies have enough cash to clear their credits in a very short span.
- Sustainable for a long time - Blue chip companies are those companies that almost reached their growth potential and after that, they only focus on sustainable growth and their associate businesses.
- Stable Returns - These stocks are known for their stable returns like Google, Amazon, and Apple. They cannot be considered as assured returns but the chances of going down is very low, due to which they are advised to start investing.
Why invest in blue chip stocks
Investing in blue chip stocks is a good way to ensure that your money will grow. There are many reasons for this, but the main one is that these companies have a long history of staying on top of their game.
The benefits of blue chip stocks are as follows:
- Grow Wealth - Investing in blue chip stocks is a good way to grow your wealth over time. It can provide capital appreciation, dividends, or both. Investing in blue chip stocks offers several benefits. They are easily identifiable by their size and stability. Investing in them is also more secure than investing in emerging markets or startups because they have been around for a while and are well regulated by law.
- Stable Returns - Investing in blue chip stocks might be the best decision you will ever make. It is because these stocks are considered to be of high quality and are considered to offer more stability than other low-quality companies do. Blue chip stocks are some of the most stable investments you can make. One example of this is Apple, which has not failed to increase its value since 1977, when it went public on the stock market.
- Risk mitigation strategy - It also helps to mitigate your risk by adding blue chip stocks to your portfolio can lead to minimizing the market risk.
- Market Leaders - Generally, blue chip stocks are market leaders and replacing them from their dominating position sound difficult for any company. Just like if we think of Apple nowadays to lose their market share in electronics and accessories sound quite difficult.
- Portfolio Diversification – Blue chip stocks can also help diversify your portfolio, reducing the downside of your investments and raising the potential for better returns. Blue chip stocks can minimize the overall risk of your portfolio.
- High liquidity- Blue-chip stocks are traded in high-volume compared to other stocks. It creates an easy entry and exit for an investor. It ensures a low chance of being stranded in a position.
- Safety of your investment - Investing in blue chip stocks ensures the safety of your investing. As these companies are well established and reputed in the market, nullify the possibility of being made a fool.
- Source of Passive Income - Investing in blue chip stocks is a great way to make a passive income. With a blue chip stock, you are investing in a company that has been around for years. They have proven their worth and this makes it easier to trust them with your money.
- Low Risk - Blue chip stocks are not guaranteed to rise in value over time but they will most likely increase in price. This is why they are considered safe investments - you are less likely to lose all of your money with them than if you invest it elsewhere.
In addition, blue chip stocks offer consistent dividends year after year. Their stability and consistency can be seen as an advantage for people who want consistent returns on their investments and do not want the risk of sales and trading fees.
Investing in blue chip stocks is a good financial decision. They provide a number of benefits such as low-risk, predictable returns, and lower volatility.
However, it is important to note that you need to be careful and understand the different risks involved. It may not be the best idea for younger investors who may not have enough time to wait out a market downturn.
The returns from blue chip stocks are also taxable like other stocks and investments. Here are the rates and brackets of tax on your capital gains.
- Short-term Capital gains- If you sold your stocks before one year of the purchase at higher prices compared to purchase one then you have to pay 15% Short term Capital gain tax and on the amount of tax you further have to pay 4% CESS which accumulated at 15.6% effective tax rate.
- Long-term Capital gains- If you sold your stocks after one year of the purchase at higher prices compared to purchasing one then you have to pay 10% of Long-term capital gain tax.
In addition to that if, your gains are exempted until 100K INR. Further, if you are not under any taxation slab you do not pay a single penny as tax. However, you have to convey the information via filing an ITR.
Pro-Tip - You can save tax by realizing your capital gains of 100K INR after one year of investing by buying and selling your stocks at the same point in time.
Like if, you invested 500K INR in a company named XYZ and after one year, its price rose up to 600K INR. You may sell it after completion of one year, realize your unrealized gain, and take benefit of tax exemption.
By this method, you can utilize a maximum of tax exemption.
Suppose in the second scenario your investment rose up to 1500K INR and sell it after 10 years. You will end up paying 90K (10% of 900K) as long-term capital gain tax.
Nevertheless, if you follow the above method for 10 years you will divide your gains into 10 years and end up paying 0 tax.
United States of America (USA)
The amount of tax on your capital gain mainly depends on two factors how long you held the investment and your income level.
- Short-term Capital gains- If you sold your stocks before one year of the purchase at higher prices compared to purchase one then you have to pay the same rate of tax as your ordinary income, which is determined by the marginal tax bracket you fall into. However, the marginal tax brackets change year on year but in 2021, it varies from 10% to 37%.
- Long-term Capital gains- If you sold your stocks after one year of the purchase at higher prices compared to purchasing one very for every person based on their income which can be 0%, 15%, and 20%
For more, you may visit Nerdwallet where they give a detailed explanation of tax brackets for single filler, married filler jointly, or married filler separately.
Example of blue chip stocks
Giving a clear insight into how a blue chip should look like I prepared a list of top blue chip companies in the USA, UK, and other parts of the world.
I lay down special attention to fundamentals and growth prospects as well as the current position of the company to be listed in my list.
Blue chip stocks are a subset of a company’s share that has a long history of paying out dividends.
Blue chips are not always the best investments because they represent established companies with low risks but also low growth prospects. Investing in them is safe but not necessarily lucrative when compared to other types of investments such as startups or smaller firms with higher risks but higher growth prospect
Just like any other investment, choosing the right blue chips requires research and more research. As you invest in these stocks, make sure that they have a dividend yield higher or equal to 2%.
Moreover, as with any investment, avoid buying shares in companies that are not paying out dividends.