Why You Should Buy Penny Stocks And Large Caps

Most investors and traders alike understand the dissimilarity between penny stocks and blue chip stocks. The stark difference is such that they can easily be placed on opposite ends in comparison. One is an industry of very limited resources with a small market capitalization whereas the other is a corporation with strong reputation in market and ample capital resources.

I believe investors should own both types of stocks for different reasons.

A Bit About Penny Stocks

Penny stocks are offered by those firms which are in the growth stage, are relatively new in the market, and where there is often uncertainty with the future of the company. The shares are sold at a much lower price – typically less than a dollar. These companies are attractive to traders mainly due to the possibility of the company shifting from a growth stage to a point where they can rapidly expand, along with the share price.

There is definite risk involved but with little speculation the investor gets to be a part of an up-and-coming company which can turn out to be very profitable.

Understanding the Blue Chip Stocks

Unlike a penny stock, Blue chip stocks are offered by those companies which are backed by large amounts of cash and have a strong reputation in the market. They are listed as the top 500 companies in the United States in the Dow-Jones-Industrial-Average-list. The market capitalization of these companies is an overwhelming amount of more than $500 billion. The selling price for the Blue Chip Stocks is high – typically at least $10 and more often much higher.

Managing Risk

Despite the potential for high yields, the risk for investors is high when they invest in penny stocks. Blue chip stocks are more secure but the returns are lower over a longer period of time. The investor must weigh in the benefits and risks of penny stocks and blue chip stocks before making the concluding assessment. Of course, by having both in your portfolio, you can get the best of both worlds.

The balancing of investment in either type of stocks should be done carefully. Although riskier, the penny stock provides the opportunities for quick returns and can be a good addition to the portfolio provided they amount to no more than 20% of an overall portfolio.

Alternatively a penny stock ETF may be a viable option. The blue chip stocks provide security and modest growth.   These large caps are suited for people nearing the tenure of their professional careers. They also provide the mature investor a good option for placing funds where growth and returns are slow but more stable and secure.

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