Blue Chip Stocks v. Penny Stocks
Blue chips, like in poker and other card games, are the most expensive chips. Similarly, blue chip stocks are worth the most and come from larger companies. Penny stocks are very low priced stocks that trade anywhere from a fraction of a cent to a few dollars.
Blue chip stocks are the most valuable stocks on Wall Street and are usually from companies that are household names, such as ATT, McDonald's, and Starbucks and tend to be large or mid-cap stocks. Blue chips have a long operating history, steady earnings, and a good reputation. They also have high liquidity, or the ability to trade large amounts of a stock without any problems. Blue chips are considered safe bets, especially if the market is falling. However, some blue chips do not always perform well.
Penny stocks often belong to newer companies with little operating history and tend to be small-cap or even mini-cap stocks. They are usually indicated with an .OB or OTC (over-the-counter) after the stock symbol, which means that their shares are not traded on the major exchanges.
Penny stocks can be difficult to trade because of low liquidity and volume issues, but they can still attract investment capital from certain types of investors. Penny stocks are a very risky investment and there is no guarantee against bankruptcy, but they represent an interesting opportunity to speculators who benefit from the incredibly low share price and the potential for enormous upside.
Not all large-cap stocks are considered blue chip stocks. Shares of the high-flying Internet stock VA Linux went up 300% on the date of the initial public offering (IPO) and had a high enough market capitalization to be considered large cap, but it didn't have a long enough operating history to be considered blue chip. In addition, numerous IPOs start out strong but drop drastically in the following months.
Blue chips and penny stocks are basically opposites, but there is no guarantee that either one is a great investment at a given time. Investors must always be careful when buying any kind of stock. Investors sometimes have the misconception that penny stocks are cheap and therefore will eventually have upside potential. A low share price does not actually mean that a stock is cheap. Only by researching a company's earnings reports is it possible to determine whether a stock's current price over- or under-valued.