16 February 2016

Penny stock vs Blue chip

What is a penny stock? if you were to seach the web you will find out that shares that are trading below $1 and according to SEC (Securities and Excahnge Commission) shares that trade below $5 are term as penny stock. Since penny stocks are low priced, most have a very low market capitalization.

However to me, my own definition is share trading at below $1 are term as penny stock. Now, why is that so? Because the word penny simply means "a bronze coin, the 100th part of the dollars of various nations, as Australia, Canada, New Zealand, and the United States; one cent"! As simple as that!!! So as long as they are trading in cents, they can be known as penny stocks.

What is a blue chip and how does the name derived? the word blue chip actually came from the game of poker as blue chips have the higest value! Blue chip companies tend to be high quality and usually are high priced (some call them the polished diamonds). They are high priced genrally because of public confidence that they have stable earnings, strong name in it industry and have been in the business for long. Personally I have know some investor who told me that as long as the company pays dividends consistently for more than 5 years, they can be called a blue chip company.

Now you have learnt the definition of a penny stock and a blue chip, so is it always better to invest in blue chip than penny stock? This is the question most investors will got it wrong be it the newbies or the seasoned ones, most thought that blue chips are always better than penny stock. In fact, the answer is NO!

I had came to know an investor (no name mentioned) who invested in blue chip after getting his profit from penny stock lost all his money as the authorities found some financial irregularities in that particular blue chip company and few months later that blue chip company went bust!

 Therefore, be it blue chip or penny stock, as an intelligent investor we need to find out more about the company we invested in. Some of the questions we need to ask ourselves are:

1) How does the company make money from their businesses?
2) Are there any irregularities in their annual report?
3) Have their earnings been consistent? Etc........

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