Before we start you should know what a stock market is, a stock market is a kind of a hub in which people buy stocks or sell their stocks which could be in the form of equity or shares in many businesses.
Like a Poker game or a Card game, there are many chips used as a currency in the casino or even a bar poker, the most expensive chip is the blue-chip stock and the cheap one is the penny stock.
Penny stocks are cheap and very low because of their value as they cost anywhere from a fragment of a cent to a few dollars.
Whereas blue-chip stock is valued way higher than a penny stock on wall street because they’re considered good for long-term investments and their constant returns.
What Is a Penny Stock?
Penny stock as the name suggests has a pretty low equity capital and is marketed at a very low cost. As most people consider it in the “junk” sector of the stock market due to its low price which starts at a cent to a few dollars.
It is a high-risk gamble to invest in a penny stock as it could eventually leave you penniless. In the Securities and Exchange Commission (SEC), a stock that’s listed on the national stock exchange and is traded for under $5 is known as a penny stock.
Penny stocks are also traded on large trade-offs such as New York Stock Exchange (NYSE), most trades are done by OTC transactions by the electronic OTC Bulletin Board (OTCBB) or privately-owned OTC markets group.
Pros and Cons Of Penny Stock
Pros
- Offers small companies to gain public funding.
- It offers access to large marketplace listings.
- Despite a lower price, it offers a noteworthy upside in share appreciation.
Cons
- Penny stock has a deficiency in the liquid market resulting in few buyers, even when the price is increased.
- Little information is provided on the company’s financial record.
- Penny stock has high odds to be a fraud and can even bankrupt fundamental companies.
How Is a Penny Stock Risky?
Having a very low market capitalization and dealing at a very depressed price makes penny stock risky, some factors for this are as follows:
- Lack of information
- No minimum standards
- Highly risky
- Low liquidity
- Poor business fundamentals
- Listed on small exchanges
Penny Stock Companies
There are many penny stock companies whose stock values range from cents to a few dollars, some of them are listed as:
- GHSI (Guardion Health Sciences) has a current price of $0.20 +34.3% and an average volume of 5.36 million.
- SNDL (Sundial Growers) has a current price of $0.40 +2.7% and an average volume of 93.84 million.
- LIVX (LiveXLive Media) has a current price of $0.70 +10.8% and an average volume of 1.12 million.
- ENDP (Endo International) has a current price of $0.47 +17.7% and an average volume of 6.58 million.
How Is a Penny Stock Created?
Small companies and ventures commonly offer stock as means of raising funds to grow their business. It’s a long process, offering stocks is one of the most effective and fastest ways of raising funds for a business.
A penny stock is created by a process called Initial Public Offering (IPO). If a company wants to be listed on the OTCBB the company should file a registration statement with the SEC.
The company must also check the security laws where it plans to sell the stock. When the company gets approval, it may start to offer its stock to investors.
Sign of Fraud
Well, there’s no way of knowing which penny stock is fraudulent, SEC recommends to new or even experienced investors to follow signs in the company’s record.
Big benefits but small profits, financial statements containing weird items in the notation, odd inspection issues, and large insider ownership are some of the factors investors should look into.
Trading of a Penny Stock
When the stock is sold to the investors, they can start trading with the secondary market by listing on the exchange such as NYSE, Nasdaq, or trade OTC.
Due to strict issues of larger exchanges, stock issuers do not qualify to list on a larger exchange. Therefore their shares trade over the counter (OTC) via an electronic trading service.
Companies also make another market offering after IPO which weakens the shares but invites more investors and more capital shares. Moreover, it’s mandatory for the companies to publicly keep the financial statements updated for the investors.
What Is a Blue Chip Stock?
Blue-chip stocks are a vast company that has an excellent reputation. These are normally large, well-managed, and financially stable, and have been in the stock market game for a long time as they often pay a portion to the investors.
A blue-chip stock normally has a market capitalization in billions and is the market leader or among the top three companies.
For this reason, the blue-chip stock is the most popular among investors. Some of the major blue-chip stocks are IBM Corp., Coca-Cola Co., and Boeing Co.
Where Does the Term “Blue Chip” Come From?
The term blue chip comes from the poker world, where chips were used as a gambling currency instead of dollars.
The blue chip was superior among the chips even dethroning the red and the white chips and setting itself as the most expensive among the chips in poker.
What Is a Blue Chip Stock?
Dividend pay isn’t necessarily a blue-chip, mostly blue chips have a lengthy record of paying firm and rising dividends.
The term has been taken from the world of poker, Blue-chip is normally a component of the respectable market, indexes, and average.
The Dow Jones Industrial Average, The Standard and Poor’s (P&S) 500, the Nasdaq-100 in the US, TSX-60 in CA, and the FTSE index in the UK.
The Safety of Blue Chip Stocks
The blue-chip company may have survived many hurdles and market cycles, due to this the blue-chip has been recognized as a safe investment, but that’s not always the case.
In some cases, such as The Lehman Brothers and General Motors, there were bankruptcies. Furthermore, many banks in Europe collapsed during the global recession of 2008. This proves that the strongest companies can also go through hard times like these.
What Makes a Company a Blue Chip Company?
Blue chips are the colossus of the company which makes them well-known in their industry. Also, well-capitalized and everlasting stability plays with strong financial odds.
Blue-chip companies usually have these in common:
- Vast
- Older
- Reliable
- Pays constant dividends
- Exhibits stunning results
- Good business model
- Has solid balance sheet
- Fraud-free investment
Examples of Major Blue Chip Companies
Here are some examples of blue chip stocks in the S&P 500 or the Dow 30:
- IBM
- JPMorgan Chase
- Walmart
- TCS
- ONGC
Blue Chip Companies That Started as Penny Stocks
Some of the companies which had gone through many hurdles and challenges to get to the apex by becoming the blue-chip companies are:
Eicher Motors
- The company has no debt left
- The company has exceeded a lot
- The company can handle a healthy dividend payout of 22.88%
Kotak Mahindra Bank
- The stock has been generating way better returns on shares than bank FD
- It is a good time to consider as the stock is not in the overbought sector
- The stock has not been on the ASM/GSM list and no holding promoter is guaranteed
Lupin Ltd
- The stock is not in the over-bought section so it’s a good time to consider
- The stock is not on the ASM/GSM list and there’s no holding promoter
Which Is Better in Paying Dividends: Penny Stock or Blue Chip Stock?
Penny stock is a non-maintained stock that rarely pays dividends. Thus, it’s not recommended to invest in the penny stock as it won’t meet an investor’s expectations.
Whereas the best blue-chip stock is the Canadian Dividend Stock which offers both the capital income growth capability and constant incomes from dividend payments.
The Penny Stock Companies That Were Once Blue Chip Companies
There are a lot of companies that become penny stocks every year and some of them are listed below
Sintex Industries: Having a CPM of 11.2 it started in 1931, which is a textile and yarn company. Its textile division is located in Kalol, Gujarat whereas its yarn division is located in Amreli Gujarat.
Sterling Biotech: It has a CPM of 0.70 which is a Pharma Grade Gelatine & DI- Calcturu Phosphate and other Pharrua products.
JCT Ltd: It has a CPM of 5.20, it started the Business as a manufacturer of cloth and nylon filament yarn, and its manufacturing facilities are situated at Phagwara and Hoshiarpur in Punjab.
The Full Difference Between Penny Stock and Blue Chip Stock
| Blue Chip Stock | Penny Stock |
|---|---|
| From vast, profitable, and fraudless companies and more progressive companies | Hypothetical stocks from the new, small, and unknown firms |
| Constant income and increase in value | Highly unstable price and penurious long term returns |
| Dividend-paying | No records of paying dividends |
| Very expensive | Very low priced (1 cent – 5$) |
| Elevated liquidity | Shallow liquidity |
| Traded on the stock exchange | Traded on OTC or Pink Sheets |
Conclusion
I conclude the article by saying that blue chip is way better than penny stock as it has made its place at the top by giving investors safety and protection to invest without any worry of the stock being a fraud.
On the other hand, the penny stock is the junk of the stock market as there is no protection and safety. This leads to high chances of scams and also issues of fraudulent stock.
If I compare both, I would go for the blue chip. Although it’s a little expensive if compared with the penny stock, it assures safety and protection in investing plus it gives regular funding on dividend payments.
But the penny stock doesn’t give us regular income on dividend-paying, which makes it less worthy as compared to the blue-chip stock.