What are Blue Chip Stocks?
Good returns, lesser volatility, stable earnings and high quality are the characteristics of a ‘Blue Chip’ stock. To be precise, a Blue Chip stock is a company that has proved its mettle on the books of accounts over the years. It is the stock of a company that has grown steadily over the years, with the ability to pay increasing dividends.
With just so much on the basics of a ‘blue chip stock’, let’s see what it has in-store for the retail investor who is looking all worried about investing in the stock market. May be, this write-up will throw some light on the stock market and the blue chip stock.
A blue chip stock may be considered as boring or uninteresting by many investors, but it isn’t by accident that they are the first choice of premier financial institutions and wealthy investors. Measure the performance of a blue chip stock over the years, and you will be surprised to see the money it has minted for its owners.
It is no wonder the term ‘blue chip’ was coined from the game of poker where the most valuable playing chip was in the colour blue. The blue chip stock yields for the investor who is prudent enough to identify the stock and hang on to it in times of war and peace, good and bad, deflation and inflation. Investing in blue chip stocks and staying invested are not unknown secrets, they have just been taken for granted. They have been subdued by the notion and fashion of making quick money in the stock market. Blue chips stocks have long reigned supreme and the goods and services of these companies make our very lives.
The Investor and the Gambler
When Himanshu was 30 years old he wanted to invest in the stock market. He planned to do it the neat way and invested his saving of INR 1,00,000/- in a blue chip stock. His best friend Sanjay was also eager to join hands with him. However, Sanjay was influenced by his peers, who gave him advice and shared their experiences about making money in the stock market. Himanshu knew that trading in the stock market was not his cup of tea, as he wasn’t willing to go through the agonies of decision- making each time the stock price went up and down.
ICICI Bank was the blue chip stock Himanshu decided to buy after lot of deliberation and consulting from friends and financial advisors. He bought a 125 ICICI bank shares at INR 677/- per share in October 2006. Sanjay waited for the share price to fall. By the end of November the stock price rallied to INR 900/-. Not waiting further Sanjay took the call and bought a 100 ICICI Bank shares at INR 891/- . It was a home run for ICICI bank and the stock price kept touching new highs every other month till the end of December 2007.
Himanshu and Sanjay were excited to see the unrealized capital gain. Himanshu particularly, found it unbelievable. However, he wavered not. Sanjay’s friends kept telling him that a stock reaching new highs actually indicates a bottomless fall sometime in the near future. And so it happened! To Himanshu and Sanjay’s shock the stock price was back peddling quicker than they could imagine.
Sanjay took the good advice of his friends and exited from the stock when he thought his losses were low. He sold his stock at INR 671/- in Aug 2008. Himanshu was unmoved. Sanjay thought two years was a good time to stay invested in a blue chip stock. Well, some of us would agree to it. In the year 2009, the stock price of ICICI bank tumbled to INR 351/- . Sanjay took a lot of pride in telling Himanshu that selling the stock early on was the right call. But ICICI Bank was blue chip all along.
By this time Sanjay traded on a lot of midcap stocks, made some profits, booked some losses and exited the share market with a loss of 20% on the total money he invested in the stock market. Himanshu held on to his ICICI Bank stock. Irrespective of the stock price the bank paid dividends every year to its shareholders. Come the mid of 2009 and the stock started rallying again. From then on ‘UP’ was the way for the ICICI Bank stock. In June 2014 the stock price stood at INR 1400/- . Almost a 100% growth in the value of shares for Himanshu. He still continues to hold the stock. After a 5:1 stock split in 2014 he now holds 625 shares at INR 272/- per share.
Now that’s what a blue chip stock can give you -A 100% growth! In some cases even more.
If you are trying to get too rich too quickly the stock market is definitely not the place for you. Equity yields only when you stay invested in the right stock. The day to day volatility of the stock market is driven by a number of factors. A dividend paying stock has a high chance of survival during a tumultuous economic time and fall less in a bear market as they eventually drive out rivals due to their financial stability. They have something called as ‘yield support’. Watch out for those blue chip stocks as they are the building blocks of your wealth in the stock market.
This article has been contributed by Right Horizons