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What are Blue Chip Stocks?

A blue-chip stock is the stock, of typically, financially sound companies that have had a healthy operation for many years and have dependable earnings. These stocks also often pay a steady dividend to their investors. Some of them tend to be high dividend yield stocks. Generally, a blue-chip stock is a market leader in its sector or amongst the top three by market capitalization. All these factors make them very popular among investors.

Why is Blue chip stocks a good investment?

Any investor would want to stake a business that has demonstrated profitability over multiple generations. They may not be among the set of buzzing stocks all the time, however; over the long term, blue-chip stocks tend to make money for the shareholders. Therefore, these are a great investment for people who can hold on through thick and thin, and through market cycles.

Risk and return of blue-chip investment

Blue-chip investments are low risk, low return investment in the short-term. Therefore, blue-chip stocks should form the core of your portfolio, but should not be the only type of investment you make. You should also invest in a few mid- and small-cap stocks, based on your risk appetite. Blue-chip stocks are a favourite of retirees and rich investors, but most beginners tend to stay away from these. The reason is, low short-term returns are not attractive for investors looking to make money quickly, but the low risk associated with these is great for retirees for whom the safety of their capital is much more important. Similarly, long-term prospects are attractive to investor who may not need to withdraw the money in a hurry.

Safety of blue-chip stocks

Always remember that past record is not a guarantee of future performance. Even the best of the companies can struggle, and therefore you should diversify your investments to reduce the risk of losing all your money during a bad run.