Difference Between Blue Chip & Penny Stocks

Difference Between Blue Chip & Penny Stocks

The Indian stock market is home to over 7,000 companies. And these stocks of all these listed companies can be grouped into different categories based on various factors like the sectors they belong to, their market cap, and other such aspects. If you are planning to get into the practice of online trading, it is important that you understand the different types of stocks in the market, and how they vary from one another. 

 

Among the many types of stocks that you can trade in online, blue chips stocks and penny stocks are perhaps the most talked about options. Interestingly, they are also on the opposite ends of the price spectrum. Want to know more about these two kinds of stocks before you get started with online trading using your trading account? 

 

Let’s find out more about blue chip and penny stocks and see how they are different from one another.

 

What are blue chip stocks?

Blue chip stocks are the stocks of companies that are well-established in their own respective sectors. These are companies that may have a history of solid profits going back 5 to 10 years, and they typically have high market capitalisation as well. Considering the history of profitability that these companies have, they are generally considered safer to invest in by most experts and investors alike.

 

Some of the popular blue chip stocks in the Indian stock market include Tata Consultancy Services, Reliance Industries, Infosys and Hindustan Unilever Limited. 

 

Here are some of the top characteristics of blue chip stocks —

  • Large market capitalisation
  • Popular presence in the market
  • Sound financials
  • A history of stable long-term growth
  • High weightage in market indices
  • Consistent dividend payouts

 

What are penny stocks?

Penny stocks are the stocks of small companies that are traded in the markets. They typically have very low share prices, leading to their name — penny stocks. In the American markets, stocks that trade at prices below $5 are considered to be penny stocks. In India, stocks priced around Rs. 25 or lower are grouped into this category. Unlike blue chip stocks, penny stocks tend to have a lower market capitalisation and often, lower profitability and lower potential for long-term growth.

 

Some of the penny stocks in the Indian financial markets include South Indian Bank, Suzlon Energy and Jaiprakash Power Ventures, among others. 

 

The key characteristics of penny stocks are as follows —

  • Low market capitalisation
  • Weak financials
  • Lower possibility of long-term growth
  • Low or no weightage in market indices
  • Inconsistent or no dividend payouts

 

Blue chip stocks vs. penny stocks — The key differences

Needless to say, since penny stocks and blue chip stocks are on the opposite ends of the spectrum, there are several points of differences between the two. Check out the key areas in which these two categories of stocks vary from one another. 

 

Long-term returns 

Blue chips stocks may typically offer better returns over the long term than penny stocks do. This is because the price of the average penny stock may not increase much over the years. There are also more bad penny stocks than good ones, and these stocks are also often affected by pump and dump schemes. 

 

The overall result is that if you are looking for a long-term investment avenue, penny stocks may not be the right choice. Blue chip stocks may be pricier, but they also have a higher potential to generate good returns over several years. 

 

Dividend payouts

Dividends are a part of the profits of a company that are distributed to the shareholders from time to time. Blue chip stocks tend to pay dividends more frequently than penny stocks. This is because blue chip stocks are issued by companies that are typically more profitable than their penny stock counterparts. 

 

Penny stocks, on the other hand, rarely (if at all) pay dividends. These stocks do not have the history of profitability that blue chip companies enjoy. So, they are not dividend paying stocks in most cases. In case you want to invest in stocks that offer the benefit of dividends, it may be a better idea to consider blue chip stocks for your portfolio instead of penny stocks. 

 

Track record

Blue chip companies typically have a good track record financially. They are profitable, they pay out dividends and they record good growth, for the most part. This boosts investor confidence and makes them attractive investment avenues for long-term investors. 

 

Penny stocks, on the other hand, have no proven track record that you can rely on to predict their performance. They may or may not succeed over the long term, which is why they mainly appeal to speculative investors who have the risk appetite to take a chance and invest in these stocks. 

 

If you are a new investor venturing into the markets for the first time, or if you are quite conservative in your approach to risk, it is advisable to steer clear of penny stocks because of the high degree of uncertainty involved in their prices. 

 

Conclusion 

Now that you know what blue chip stocks and penny stocks are, you can evaluate which type of stocks are better for your financial goals. Remember that whichever kind of stocks you wish to invest in, you need a demat account and a trading account for your online trading. 

 

If you do not have one yet, you can open a demat account online with Motilal Oswal. The entire process is quick, simple and completely paperless. It is also absolutely free of cost, and with just this one account, you get a demat account and a trading account together, so your online trading can begin right away.

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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