The world of stock market investments offers a range of opportunities for all kinds of investors, whether you are looking for a high-risk, high-reward investment option or need something more stable. Penny stocks and blue chip stocks, even though different, are quite popular among experienced investors. And while they both have their fair share of pros and cons, you should learn about their key differences in order to make informed investment decisions.
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Company Size and Stability:
Penny Stocks:
This kind of stock usually belongs to smaller, emerging companies. Some of these companies have the potential to grow substantially, while others may lack the financial stability like established companies. This is why it is recommended to perform due diligence while investing in penny stocks. Some popular penny stocks are Allied Esports Entertainment Inc., Astrotech Corporation, Birks Group Inc., etc. You can also refer to this list of promising penny stocks if you don’t know where to start.
Blue Chip Stocks:
Blue chip stocks are mostly large, reputed companies with a history of stable earnings, consistent dividend payments, and strong balance sheets. These stocks have displayed resilience over the years and have survived economic downturns. They have earned the trust of their investors by offering steady performance.
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Risk and Reward:
Penny Stocks:
Typically priced under $5 per share, penny stocks are known for their volatility. Due to the lower price per share, these stocks experience larger price fluctuations. While this investment option has the potential for substantial profits, it is highly risky. This is why risk-tolerant investors find these stocks quite attractive for quick gains.
Blue Chip Stocks:
These stocks belong to well-established companies with a long history of stable performance. They offer consistent returns and are a safer bet for investors with low-risk appetite. They may not offer you massive returns in a short period, but they are more reliable if you want to play it safe.
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Market Capitalization:
Penny Stocks:
Penny stocks are usually categorized as micro-cap or small-cap stocks since they typically have a market capitalization of less than $300 million. The small size of these companies often leads to higher volatility since they are more susceptible to the ups and downs of the market and other external factors.
Blue Chip Stocks:
Blue chip companies generally belong to the large-cap category, where the market capitalizations are in the billions of dollars. Due to their size and established market presence, they offer a more stable performance, making them a great choice for long-term growth.
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Dividends and Income:
Penny Stocks:
These stocks rarely offer any dividends as the companies are most likely to reinvest their earnings into growth opportunities. Most investors choose this type of stock for capital appreciation and not for income generation.
Blue Chip Stocks:
On the other hand, blue-chip stocks are known for their history of dividend payouts. Most of these large companies distribute a portion of their profits to their shareholders in the form of dividends. This offers the investors a steady stream of income along with the potential for capital growth.
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Liquidity and Trading Volume:
Penny Stocks:
The lower trading volumes often lead to wider bid-ask spreads and difficulty executing trades at preferred prices. This is the reason why liquidity can be an issue with such stocks. An investor needs to be very careful about such illiquid stocks as the exiting positions may seem a bit tricky.
Blue Chip Stocks:
These stocks have high liquidity and significant trading volumes since they are a part of the major stock indices. In other words, investors can easily buy or sell shares without influencing the price of the stocks.
Conclusion
As an investor, you need to have clarity about your investment goals. If you are willing to take risks for quick gains, penny stocks are great for you. However, blue-chip stocks may be the right investment choice for you if you have a low-risk appetite and want stability. Based on your risk appetite and your investment goals, you can choose the one that suits you best.
