Investment word of the day: Blue-chip stocks — characteristics, pros and cons you must know

Investment word of the day: Well-established, financially stable companies with a significant market share are popularly known as blue-chip companies. Many traders and investors prefer shares of blue-chip companies as they typically offer stability and regular dividends.

What are blue-chip stocks?

A blue-chip stock is issued by a large, established company known for its financial stability and strong reputation. These companies typically have a long operating history, generate consistent earnings, and often distribute dividends to their investors. Such companies have a high market capitalisation and are often among the top firms in their sector.

Significance of blue-chip stocks

Stability

Often considered to be the backbone of a stable and well-diversified portfolio, one of the most notable advantages of blue chip stocks is “Corporate Stability”. Market experts consider them the smartest choice of investment because companies backed with strong corporate fundamentals like these tend to weather economic downturns far better than others, according to Siddharth Maurya, Founder and CEO, Vibhavangal Anukulakara Private Limited.

Regular dividends

“They also pay out regular dividends, which add to the stream alongside capital appreciation. To add, these companies are also trusted for their strong governance, global presence and name brand,” he added.

Low volatility and minimised risk

Blue-chip stocks are recognised for their low volatility.

“Another noteworthy point is their Trade Centres Ranking and Daily Trading Volume. Left unchanged, the prices of “blue-chip” stocks have indeed been acknowledged to undergo very low volatility so investors are in no danger of having to face spending more than their stocks are worth. These assortments or groups of stocks are bought and sold regularly because they are considered not only low risk but also ideal for long-term institutional Investments,” Maurya said.

Blue chip stocks present opportunities for investors seeking consistent performance with minimised risk. Although they may not yield the same level of returns as more volatile equities, they offer safety, reliability, and substantial long-term growth potential, making them a favoured choice for prudent investors, according to the expert.

Disadvantages of blue-chip stocks

Lack of growth

Blue-chip stocks offer comparatively limited growth in a bullish cycle of the stock market.

“In contrast to mid-cap or small-cap companies, these stocks may have a restricted growth opportunity during a bullish cycle. Often, their size and maturity mean slower growth and expansion. Furthermore, during economically difficult times, no stock, including blue chips, escapes volatility,” Maurya said.

Valuation concerns

“Another factor to think about is valuation. Blue-chip companies are known for their stocks, and thus are overvalued which diminishes room for price correction until investors see significant sales growth,” he added.

In conclusion, blue-chip stocks help investors establish a solid foundation for their portfolios. While they may not promise dramatic growth, these stocks offer reliability, steady cash flow, and a stable value essential for sustained wealth accumulation.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.