Owning shares and investing in the stock market have historically been among the best ways to make your money grow over time. But before jumping into investing in the stock market, you have to decide the kind of stocks you’re going to buy, as there are many types of stocks you can invest in. To do so, you first need to have a trading plan and a strategy to follow with clear objectives in mind.
Blue chips and penny stocks are among the most popular types of stocks you should know about. Let’s now have a look at what they are, and which kinds of traders/investors use them to know if you should use penny stocks in your trading, or rather focus on blue chips.
Penny stocks vs Blue chips – Definition
Penny stocks, or “microcap stocks” are usually cheap stocks worth less than $5 in the US, and less than £1 in the UK. These stocks usually represent small market capitalization companies that can be divided into different categories. You have penny shares that are companies in trendy sectors, such as the marijuana, fintech, and biotech industries for example, whose growth potential is high but underestimated by investors. You can find penny stocks representing companies that made the choice to be really cheap, to attract as many investors as possible. And you can find penny stocks that were once important companies but whose stock prices have fallen, whether that be due to strong falls in sales, industry shifts or management issues.
On the other hand, blue chips represent large, well-known and established companies listed on stock exchanges like the London Stock Exchange, and whose market cap is usually above $5 billion. These companies are not new companies, they’ve been around for a while, which means that their stock price has a long track record with a wealth of publicly available information. Blue chips usually have a stable and healthy financial situation with a proven record of success, a reliable business model, and stable growth prospects.
Penny stocks vs Blue chips – Risk and Reward
Penny stocks are great tools to invest in with small capital to potentially make money quickly if you select the right companies. Some penny stocks are indeed tomorrow’s success, and if you’re an early investor, you can reap big rewards. These stocks are also quite volatile, which means that you can actively trade them. While this volatility can be quite useful for those who know how to take advantage of it, it can also be dangerous if not managed well.
As most penny stocks are traded over-the-counter, they do not have minimum listing standards, nor do they need to comply with information sharing standards like large companies, which means that it is more difficult to find reliable public information about them. Moreover, penny stocks usually have low trading volumes, which means that it can be difficult for you to sell your stocks when you want, at the price you want. It also means that any trade can potentially have a large impact on penny stock prices.
Blue chips, on the other hand, usually represent multinationals being a component of a reputable and solid market index, like the FTSE. They are also considered dominant leaders in their industries, which is one of the reasons why they are considered safer investments. But blue chips can still be subject to volatility and failure, as we saw during the 2007 financial crisis.
Penny stocks vs Blue chips – Which are the best stocks for you?
There’s no single right answer as to whether penny stocks or blue chips are the right kind of stock for you. You first need to decide your trading strategy and your risk tolerance. Think about your financial situation, your trading capital, and your financial goals, and take into account your personality and the time you have to dedicate to your investments to determine the kind of trader or investor you are. Once you know that, you can determine a trading or investment plan that will dictate the way you will approach the markets to maximize your profits and minimize your risk, depending on your trader profile. We will only add one thing: with greater risk comes greater rewards…