Comparing Penny Stocks to Their Blue-Chip Cousins

Many differences exist between penny stocks and higher-priced shares. By being aware of how smaller companies and their lower-priced shares behave, you can position yourself in the right kinds of companies and make better trading decisions. More important, you’ll have an idea of whether this type of investment is for you.

Investors typically organize stocks into the following categories:

 Large cap companies, also known as blue-chip stocks: Any company whose shares value them at $5 billion or more are known as large capitalization companies, or large caps for short. Some investors use the value of $10 billion as criterion for the large cap criteria moniker while others use different criteria.

Shares of the biggest companies, which are valued at billions of dollars, are known as blue-chip stocks. Many of these companies are household names, such as IBM, McDonald’s, Disney, and Exxon, and trade on the New York Stock Exchange (NYSE) or on other major stock markets.

Educating the market

Imagine standing before a huge group of people who don’t like live music. They’ve had bad experiences at concerts before, whether because the speakers were too loud, the venue had poor acoustics, or they just picked the wrong band.

But you know that some live music can be great. You know that they will love concerts if they just attend the right ones. Now imagine that it’s your job to convince them to give concerts another try. Substitute the word concert with penny stocks, and you get a sense of what I face when trying to persuade people that trading in penny stocks can be a positive investment experience.

Many people have invested in penny stocks at some point. Almost all of them have lost money on those shares, and they’ve let their negative experiences with low-quality penny stocks scare them away. However, to conclude that penny stocks are foolish investments means that people aren’t taking responsibility for the mistakes they’ve made. They have painted the entire investment class with one brush just because of their singular experience, but that’s like assuming all live concerts are bad just because you picked a bad seat at the only concert you ever attended.

My first task when speaking about penny stocks is to explain that there is a difference between low- and high-quality penny stocks. After I address the negative connotations surrounding the topic and explain how easy it is to avoid the pitfalls and junk, people always become more interested.

Low-quality penny stocks traded in the wrong ways are foolish investments. High-quality companies trading for pennies at the right time, in my opinion, are far and away the best investment choice available.

The good news is that everything you need to know to trade penny stocks successfully is included in this very book. I have no doubt that you will become a phenomenal investor in low-priced shares if you follow the suggestions in this book.

However, my biggest hope is that you go a step farther and help protect your friends and family from getting burned by the wrong kinds of penny stocks. They’ll never know that you saved them thousands. They’ll never thank you. But isn’t that the best kind of reward?

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 Mid cap companies: The term mid cap is short for middle capitalization, but you’ll probably never hear the long version of the name. These companies are typically valued between $500 million and $5 billion, but again this depends on who is providing the definition.

 Small cap corporations: These companies have total values of between $50 million and $500 million.

 Micro caps, also known as penny stocks: Any company whose total value is less than $50 million is considered a micro cap. Because penny stocks typically represent smaller, growing corporations, they’re often in the micro cap category. This category of stocks reacts to situations that are unique and material to it, even when the same events would have little impact on much larger companies.

Although micro caps are much like blue-chip shares, only smaller, they play by their own set of valuation and price behavior rules. To become consistently successful trading penny stocks, you need to understand this concept and the specific ways in which these micro cap shares behave.