What most seasoned traders know it that there is a large difference between penny stocks and blue chip stocks. They really are at opposite ends of the spectrum. One is a company with very little capital, and the other is a company that is well established and proven. They are both worthy of an investor’s attention, and they both have a place in some investors’ portfolios, depending on their goals.
Penny Stocks
Penny stocks are those sold by new or small companies that are typically still in the growth mode, though they could actually be on their way down. The shares generally sell for less than one dollar. These companies usually have a very small amount of capitalization, so they are still in the stage in which they can lose everything and go belly-up. On the other hand, they are in a stage in which, with the right funding, they could greatly excel and turn out huge profits. This is what makes them so attractive to adventuresome investors. Of course many new traders wonder “How do I buy penny stocks that will yield these large gains” – That is when it gets tricky as finding the profitable penny stocks from the duds is no small task.
Blue Chip Stocks
Conversely, Blue chip stocks are well-established companies that have plenty of capitalization and a proven record of accomplishment. Dow Jones lists these companies as the top 30 best companies in the United States in which to invest, and you can track them on the Dow Jones Industrial Average. They generally have market capitalization in excess of $500 billion. Unlike penny stocks that sell for $1 or less, investors consider blue chips to be stocks that sell for $10 or more; however, they usually sell for much higher than that.
Risk
Though both have a place in a portfolio, by their very nature penny stocks are much riskier than blue chip stocks which is often why some investors who want the growth without excessive risk opt for a penny stock index fund. It is very possible to earn a lot of money in a short amount of time with penny stocks, but usually not with blue chips. Blue chips are solid and usually earn money in the over time, but not nearly as quickly as penny stocks, which can easily double or triple in price in one trading session. It general it takes high risk to get high growth potential.
Using Both to Your Advantage
Because of the risk, most investors avoid penny stocks altogether. They can be a valuable part of a portfolio, though, especially for young investors who have plenty of time before retirement, and who are looking for growth rather than stability. More mature investors who are nearing retirement will probably seek the stability found in blue chip stocks. Middle-aged investors should consider investing in a combination of growth and stability.