Blue chip stocks are stocks of large, well established companies that are financially sound and have been operating for many years. These stocks typically have market capitalization in billions, generally, are market leaders and are among top three companies in a sector.
Now, let’s learn what are blue chip shares and what makes it a good option for investment.
The blue chip stocks are well known for their ability to cope with the adverse market condition and yield high returns. The blue chip stocks are not only the premium ones but dominant in the industry, these companies are enlisted among the best organizations in their respective sector. Mostly, the blue chip stocks have a record of yielding a consistent dividend to investors over the long term.
There are a few parameters that make a company qualify to be called a blue chip. Most blue chip stocks generate stable returns for investors. Because of the consistency the investors are protected from inflation, recession, and the economic downturn. The main reason why investor must think over the blue chip stocks is that the companies register consistent annual returns over long period with a stable debt to equity ratio.
The average ROE, PE and the interest coverage ratio of these companies record a steady performance. Also, these stocks offer regular dividends to their shareholders thus, help them to earn a regular income.
Who should invest in Blue chip stocks
Blue chip stocks are not only safe but also help investors in mitigating the risks. Here, we assume that a company with diversified operations may not see fluctuations in stock prices even though the financial performance of the company is not up to the mark for a few months or a year, but, the company will soon cover all the losses of one business function from its other business areas.
Therefore, buying blue chip stocks can reduce the chance of heavy losses. These stocks are preferred by the affluent investors who are experienced in making worthy investments.
Blue chip stocks are also considered as a safe investment option because they can endure economic downturns and are not highly volatile. These stocks are majorly dividend paying stocks. It is advisable to the investors to diversify their portfolio to avoid the company’s risk.
Most of the blue chip stocks usually have a long term investment prospect spanning over 7 plus years.
What is blue chip feature that makes it worthy to buy?
- Strong financial position
- A great balance sheet
- Stable growth rate
- The best managerial team