The term ‘blue chip’ has come from the game of poker. In poker, the chips of different colours have different monetary value. The blue chips have the highest value. This term was taken from the game of poker and used in stock market terminology.
So ‘blue chip’ companies are those which are most stable, established, well known and soundly capitalized. These companies have the highest value and market capitalization. The term ‘blue chip stock’ refers to shares of such companies.
In India, blue chip stocks are also called ‘Large Cap Stocks’. These are stocks of companies with a market capitalization of more than Rs 20,000 crores. SEBI has identified 100 Large Cap Companies listed on stock exchanges, based on their market capitalization. Market capitalization estimates a company’s net worth. Market capitalization = Share price x number of outstanding shares in the market.
A few examples of blue chip stocks or large cap stocks in India are TCS, Reliance Industries, Infosys, HDFC Bank, Hindustan Unilever, Eicher Motors, ITC, Wipro
Features of Large Cap Companies
- As mentioned earlier, large cap companies are financially stable and well established. They are consistent performers during any economic cycles.
- They have a long history of sustained growth and good future growth prospects.
- They are a part of major market indexes like NIFTY 50, NASDAQ 100 etc.
- These companies have solid balance sheets and they publish their financial statements every quarter. Investors can analyze the company’s performance from the published financial reports.
- Many of these companies are zero debt or have very low debt.
- These companies are in the businesses for a long time. There is a lot of data available on their business and financial activities. There is more transparency in terms of information.
Why should you invest in Large Cap Stocks or Blue Chip Stocks in India?
- Large Cap Companies are very stable businesses. Their probability of going bankrupt is very remote. They are able to weather all ups and downs of business cycles and stock market cycles too. They are not hugely affected by market fluctuations so they offer stability to any investor.
- As these companies are consistent performers, they offer better capital appreciation for investors over a long period.
- Some large cap companies are known to pay very handsome dividends. The dividend pay-outs help to increase wealth creation over the years.
- Investment in large cap stocks or blue chip stocks is very liquid. These investments can be sold during trading hours whenever there is a need.
Who should invest in Large Cap Stocks or Blue Chip Stocks?
In our opinion, everyone should invest in large cap stocks. Large Cap Stocks should be a part of any investment portfolio simply because of the stability and capital appreciation they bring over the long term. In particular, beginners in stock market investing, freshers who have just got their first job, conservative investors, investors with moderate risk appetite and those who want to invest for long term wealth creation should definitely invest in large cap stocks or blue chip stocks.
