You might have heard about Blue Chip Stocks and Penny Stocks if you are a stock market trader or investor. Well, both have their own advantages and disadvantages. But what are Penny Stocks and Blue Chip Stocks? And how do they differ from each other? Let’s find out!
What are Blue Chip Stocks?
Blue Chip Stocks are the stocks of big and well-established companies that have been carrying on their operations for years and feature a large market capitalisation. Trading shares of these companies are relatively safe as they are not very sensitive to market fluctuations due to their large market cap.
For example, the TCS share (TCS) is a Blue Chip and, despite the COVID-19 pandemic, which affected all stock markets badly all over the globe, managed to give a 3-year return of 16.98% to its investors.
Similarly, if you had invested in Vodafone Idea Ltd last year, you would have earned a 1-year return of 5.26%.
What are Penny Stocks?
Penny Stocks are much hyped in the Indian stock market for retail investors. However, the share prices of the companies are low. Public companies with a lower price of shares are generally called Penny Stocks. In India, Penny Stocks are small company stocks traded at a lower rate of price, generally for lower than INR 10.
These companies might be new entrants into the market or feature a very low market capitalisation. Investing in Penny stock is a quite risker as compared to the Blue Chip Stocks as they are highly sensitive to market volatilities.
Blue Chip Stocks Vs Penny Stock
| Basis | Blue-Chips Stocks | Penny Stocks |
| Investment | Ideal for long-term investments. | Ideal for short-term trades. |
| Risk | The risk Involved in Blue Chip Stocks is lower than in Penny Stocks. | Penny Stocks feature a high level of risk. |
| Dividend | Many Blue Chip Stocks also provide dividend payouts. | Penny Stocks generally do not provide any dividend payout. |
| Liquidity | They are highly liquid owing to large trading volumes. | Penny Stocks are highly illiquid due to low trading volumes. |
| Market Capitalisation | Market Capitalisation is quite high for these stocks. | Market Capitalisation is very low for these stocks. |
| Sensitivity to Volatility | Low | High |
Conclusion
Investing in Blue Chip or Penny Stocks totally depends on your investment style and risk appetite. If you are a trader who is comfortable taking huge risks for huge rewards, you can go for the penny stock, whereas if you don’t want to take much risk, then Blue Chip Stocks are more suitable for you. Or, if you are just beginning with the stock market, go with the Blue Chips, those who are beginning with this stock market, and try your hand with Penny Stocks once you have gained some exposure. If you wish to trade in both, it is advised that you should ensure an optimal proportion basis your risk profile.
