Introduction

Blue chip companies are well-established firms with excellent reputations. These companies usually have been operating for many years and are known for their stability and quality. Several blue chip stocks are household names, such as Hindustan Lever, Reliance, Infosys, etc.

The term Blue chip originated from poker. Blue chips have the highest value among all the chips and therefore are considered to be the most important ones.

In the context of the stock market, this term was used for the first time in 1923, by Oliver Gingold to describe high price stocks. Today, blue chip stocks are considered to be the most important and reliable part of any long-term investment portfolio and hence are passed on from generation to generation.

How do we identify Blue Chip stocks?

There are 3 main factors to look in for Blue-chip stocks.

1. Firstly, these companies are leaders in their industry. For example, TCS is the leader in the IT Industry and Reliance is a leader in the telecom and petrochemicals space.
2. Secondly, these companies have rich cash reserves and very strong balance sheets.
3. Lastly, these companies have some strategic advantage over their competitors because of which they continue to maintain their leadership position.

Who can invest in Blue-chip stocks?

Blue chip stocks are expensive, but relatively safer investments. Their biggest appeal is that during market downturns, when other stocks fall down 40% or 50% or even higher, Blue chip stocks maintain their strength and they are the first ones to bounce back up.
Therefore, people who are looking for reasonable growth without taking a high risk, usually prefer these stocks. Typically investors of Blue-chip companies include investors, retirees, and long-term investors.

How do we invest in Blue-chip stocks?

Well, there are 2 different ways to do that.

Investors can directly buy the shares of these companies from the stock exchange, but a better approach is to invest via Blue-chip mutual funds because from a long-term perspective, these  are easier to track and manage.

Now that we have discussed the positive aspects of investing in blue chip companies, let us talk about the limitations as well.

Limitations of Blue-chip Stocks

1. First, these companies offer relatively slower growth as compared to their mid cap or small cap counterparts. Hence, sometimes investors may feel impatient holding these stocks.
2. Secondly, these stocks are usually expensive and so the capital required for investing would be on the higher side.
3. Lastly, just because the company is a blue chip today does not mean it would stay that way. Any change in the consumer preference or industry trends can cause the stock to underperform in the future.
   
   

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