Blue Chips Stocks and Penny Stocks are commonly used terms by the investors/traders in the stock market. Each of these two stocks has its own advantages and disadvantages. The investors prefer these stocks on the basis of their liability, their dividend-paying capability while accounting for the risk involved in these stocks. Let’s understand the two stocks in more detail. What are BlueChip stocks? What are Penny Stocks? What is the difference between Blue Chips Stocks and Penny Stocks? Are Blue Chip Stocks boring? Why Blue chips are considered a good option for investors who are looking for low-risk investments with a decent return similar to Rahul Dravid in Cricket? People are attracted to Penny stocks as they don’t cost much money and promise big profits. Why Penny stocks are prone to price manipulations and regulatory scrutiny? But why trading penny stocks is also a good way to lose money.
Table of Contents
Blue Chips Stocks
What are the Blue Chips Stocks?
Blue Chips Stocks symbolizes the big and well-established companies that have operated for years. The companies that are characterized under Blue Chips Stocks include TCS, Reliance Industries, ONGC, ITC, HDFC, Coal India, Infosys, Sun Pharma, ICICI Bank, SBI Bank in India and in US IBM, AT&T, Coca-Cola, General Electric, DuPont etc.
The market capitalization of these companies is in billions. These companies are established in the industry and this ensures that the money of the investors is in the safe hands. Investing in these companies have less risk which is accompanied by giving a small dividend to the shareholders.
Blue Chip companies stocks are tracked by many Stock analysts, research houses, Mutual Funds, FIIs, HNI, etc. So these stocks are not undervalued and the future potential of these companies are factored in the current price
Many blue chip companies, for example, Tata, Reliance, Infosys etc are considered as ‘Too-big-to-fail’ companies in India as they have survived and remained profitable for a very long time. But this is not always true!! Remember Satyam? It was a blue chip company.
Characteristics of the Blue Chips Companies
Characteristics of the Blue Chips Stock Companies are given below. With these characteristics, Blue Chips Stocks are considered as a risk-free investment. These companies are matured, large-scale companies and their future growth are steady but not fast.
- Large Market Capitalization
- High Valued by the Market
- Popular Brand Name
- Good financial health
- Record of long-term and stable growth
- Good Creditworthiness
- Old and Reputed Companies
- More weight in Indices
- Better Investment Grade
- Consistent Dividends
The other characteristics of the Blue Chips Stocks include High Profitability, High Dividend Payout, and good Investment Grade Credit Rating.
Why are Blue Chip Stocks called Blue Chips?
The name Blue Chips Stocks has been derived from the game of Poker where Blue Chips are considered as the most expensive Poker Chips. The companies being established in the industry, Blue Chips Stocks is what the investors seek when they are searching for the quality stocks that hold their value. Blue Chips Stocks usually pay a regular dividend to the investors which increases year after year.
However, like the other stocks, Blue Chips Stocks are also affected by the ups and downs of the market. Instead of this, these are preferred by the investors as they tend to recover faster than other fewer quality stocks. This makes investing in Blue Chips Stocks safer for the long run perspective.
Oliver Gingold, who worked at Dow Jones, in 1923 wrote an article where he used ‘Blue chips’ to refer the stocks trading at a price of $200 or more.
What are the Penny Stocks?
Penny stocks are shares of small public companies that trade at low prices per share. In the United States, the U.S. Securities and Exchange Commission (SEC) defines a penny stock as a security that trades below $5-per-share while In the United Kingdom, stocks priced under £1 are called penny shares. In India, Penny Stocks are small company’s stocks that are traded at the low rates (Rs. 20 – Rs. 25) in the market
These companies are the new entrants in the market and are small in size with their low market capitalization. Investing in the Penny Stocks is riskier, have a higher level of volatility resulting in a higher potential reward or huge losses. To avoid losses, an investor should understand the market direction before entering into a trade. They should remain cautious as their one single mistake may incur huge losses for their investment.
Do Penny Stocks become Big?
Some penny stocks do become big. Eicher Motors, Kotak Mahindra Bank, UPL, Lupin and Titan Company are part of the elite Nifty 50 club today, were penny stocks earlier. Others which made their investors millionaires included Bajaj Finance, Shree Cement, Gruh Finance etc.
- Shares of Eicher Motors have rallied 2,61,772 per cent from Rs 10.70 on July 12 in 1998 to Rs 28,020 on July 12, 2018. An investment of Rs 55,000 in Eicher Motors shares in 1998 would have become over Rs 14 crore today.
- UPL has multiplied investor wealth by 647 times in the last 20 years. The scrip jumped from Rs 0.90 on July 13, 1998, to Rs 582.70 on July 12, 2018. Net sales and net profit have soared manifold in the same period.
No, it has not been a steep climb for any of them. Eicher Motors, Titan, UPL tested investors’ nerves for several quarters or even years before they took off.
Ashish Chugh has over time come to be known as a leading penny stock picker in India. This Delhi-based trader has burnt his fingers many a time, but the few bets on which he got it right have made him more money than what he lost in half-a-dozen others. “It is easy to buy such stocks. But you would have problems exiting them” Read more about his views in this Economic Times article.
Things to consider before investing in the Penny Stocks
To avoid the explosive moves, it is important to have a holistic understanding of the penny stocks before purchasing them. You can get best penny stock alerts for trading but the various aspects which an investor must consider before making an investment in the Penny Stock include
- Accumulating the Information This is the first and foremost step that an investor should make. The investor should collect information about the company. Data about the company’s balance sheet, stakeholders, backers, etc. need to be gathered and studied to fetch information about the company’s long-term profitability.
- Identify the Proportion of Debt Having too much debt is considered bad and it affects the long-term profitability of the company. Therefore, the company under consideration should have an adequate proportion of debt which would entice the interest level of the investors.
- Consideration of Liquidity Penny Stocks are the stocks which are traded infrequently. As a result of this, it could be difficult to find the buyers/investors when you are selling the shares in large proportion.
- Identify the Catalyst: A Catalyst acts as a game changer. Having the information like the launch of new products or services by the company would lead to skyrocketing of the price of shares. This would give investors a green signal to invest in the Penny Stocks.
Penny Stocks and Pump-and-dump
Pеnnу Stock Trading gеtѕ аll thе bаd рrеѕѕ mаіnlу bесаuѕе оf thе pump-and-dump schemes.
Pumр-аnd-dumр іѕ a vеrу соmmоn аnd unethical (even сrіmіnаl) асtіvіtу іn whісh scammers buу mоѕt оf thе ѕtосk оf an lоw-quаlіtу OTC реnnу аnd thеn promote іt strongly, ѕо thаt naive іnvеѕtоrѕ аlѕо buy thе ѕtосk, rаіѕіng thе рrісе оf thе shares. Whеn thе stock рrісе soars, thе frаudѕtеrѕ ѕіmрlу ѕеll thеіr ѕtосk, causing thе іmmеdіаtе collapse оf thе share рrісе, lеаvіng іnvеѕtоrѕ wіth ѕtосk worthless, unаblе tо rесоvеr.
Video on Penny Stocks
What is the Meaning of penny stocks & what are the pros and cons of investing in the penny stocks are explained in this 6-minute video?
Difference between Blue Chips Stocks and Penny Stocks
Blue Chips Stocks and Penny Stocks are the two different stocks that differ from each other in various aspect. The table given below explains the difference between the two stocks:
|Blue Chips Stocks||Penny Stocks|
|Investment option||Long term||Short term|
|Efforts Required in Research||Low||High|
At one end, investing in the Blue Chips Stocks is considered safe and secure for the long-term perspective. Whereas, on the other hand, investment in the Penny Stocks may give high returns, but, it comes with the involvement of high risk.
Which one to opt for Blue Chip or Penny Stock?
Investing in a particular stock depends on the nature of an Investor. If the investor is comfortable with taking a risk then they can opt for the Penny Stocks. However, if the investor does not want to take the risk then they can opt for the Blue Chips Stocks which would ensure the safety of the funds. For the fund managers dealing with both the stocks, they should ensure that an adequate proportion between the two is maintained so as to ensure maximum returns on the investment. For those who are newbies, it is recommended that they should invest in Blue Chips Stocks as to avoid the risk associated with the Penny Stocks. A good blue chip company is like Rahul Dravid, dependable and consistent. But for T-20 matches you want fast scorers.
Do you invest in Blue chip stocks or penny stocks?