Investing in the stock market has historically been one of the best ways to make your savings grow over time. Despite all the economic downturns and crashes, the stock market has consistently risen over the long run, offering investors great returns. But it isn’t always easy to pick the right company to invest in, especially when there are so many types of stocks to choose from. Penny stocks and blue-chip stocks are among the most popular types of shares investors and traders focus on. Let’s have a look at the differences.
What are penny stocks and blue-chip stocks?
Penny stocks are relatively new companies with very small market capitalization and a share price usually under $5. You can find penny stocks in almost every sector, and there are also different types of penny stocks. Firstly, they can be companies in new and trendy sectors, with strong potential growth prospects. Secondly, penny stocks could be companies that deliberately decided to be cheap to be more affordable to investors. Finally, they can be previously blue chip companies whose share prices have since tumbled after a fall in sales.
Blue chips are the opposite of penny stocks, as they are large and mature companies. With big market capitalizations, blue chips can be expensive. However, they’ve generally been around for many years, which means that they are well-established and financially sound. Blue chips are able to make profits in adverse economic conditions thanks to a tried-and-true business model, and their growth prospects are usually stable.
What are the advantages of penny stocks and blue-chip stocks trading?
Investors that do their research have a greater chance of picking penny stocks that provide strong returns. This type of stock is a great way to make money with a limited budget. Moreover, penny stock investors have the chance of picking penny stocks that become tomorrow’s next big thing, riding a big growth wave, and profiting enormously in the process. As volatile stocks, penny stocks are also great financial assets to be actively traded and make quick profits.
Blue chips, on the other hand, are less volatile and more stable shares, which better fit more conservative investors that aren’t looking for risky shares. As large multinationals that have existed for several decades, blue chips can provide investors a proven track record of success – not to mention that they’re usually industry leaders with a strong reputation with consumers, as well as with investors and shareholders. Investing in blue chips also means that you can benefit from regular and growing dividend payments.
What are the risks of trading penny stocks vs blue-chip stocks?
As small and relatively new companies, penny stocks aren’t traded on regulated exchanges, which means that it is harder to find reliable public information about them. This lack of information transparency makes it difficult for investors to truly understand the business model and anticipate growth prospects. The selection process is therefore complicated. Penny stocks are also very volatile stocks, which can be really risky.
Because they’re traded on big exchanges, blue chips are safer to trade, and it is really easy to find financial information and other types of data about these companies. These publicly traded companies also have to observe standards imposed by exchanges. Still, blue chips can be subject to high volatility and scandals, leading to share price falls and even bankruptcy – an example being the Lehman Brothers during the 2007 crisis.
Penny stocks vs Blue chip stocks – Which one is best?
The best type of stock for you depends on your trading style and strategy, as well as your risk tolerance and your financial goals. If you have a high-risk tolerance and a small budget, you might want to consider penny stock trading, but if you prefer to invest in big, reliable, well-known, and stable companies, then you should turn to blue chips.