Although markets have recovered from the severe March dip, the sinusoidal equity market trends are driven by the economic recession, virus spread, and election uncertainties are keeping investors on their toes. In lieu of this, many market experts are proposing investment in blue-chip companies, as chances of losing money in these picks are relatively low.
What are Blue-chip companies that we have heard about numerous times in the stock market? A "blue chip" is used to describe high-quality big businesses that have stood the test of time. The term “blue chip” has been taken from the poker game, where the highest denomination chips are of the “Blue” color.
* How to cherry-pick blue-chip companies?
These large-capitalization companies are often so large and essential for the country that they end up constituting the benchmark index to represent the country’s economy. The easiest way to spot a blue-chip company is to sort through the benchmark indices like ASX200 for Australian companies or Dow Jones of the US.
* So, what is so special about these blue chips or large-cap businesses that make them a preferred choice for the long term and astute investors?
Having a stable and well-established business provides them with a steady cash flow, which in turn leads to consistent dividend throughout the years. However, not all blue-chip stocks pay dividends! Although the returns may seem relatively low compared to what the small caps or midcaps offer, so is the risk. Once in awhile, corporate actions like buybacks and rights issues at attractive prices, bonus shares, etc. may also be an added advantage.