If you follow the stocks market closely, you surely have heard the term blue chip or penny stocks from analysts and forecasters. Blue chip refers to stocks in a corporation with a high reputation of quality and has the ability to operate with profits through good times or bad. The term is derived from the game of poker, where blue chips are regarded as the highest value chip. The most popular index that follows blue chip stocks are the US' Dow Jones Industrial Average (DJIA) which contains only the leading 30 stocks from different industries.
On the other hand, penny stocks are shares of public companies that trade at low prices per share. Due to its cheap price, most penny stocks have low market capitalization which makes it highly volatile. It presents higher risk for investors who are enticed by the hope of making large and quick profits. Most cases of price manipulation use penny stocks because it is cheaper to purchase large quantities and can be easier to inflate the prices artificially.
To show an example of how the risks differ, let us take a look at Aboitiz Equity Ventures (PSE:AEV) and Manila Mining Corporation (PSE:MA). The graph below shows how the two stocks traded between Oct.15 - 19, 2012.
MA traded from P.0500 Oct 15 to P.05700 Oct 19, increasing by .07 or 14% in just one week. In contrast, AEV increased by P.60 from P48.3 Oct 15 to 48.9 Oct 19, but was only up 1.24% for the week. Why is it that a penny stock like MA is more volatile than a blue chip stock such as AEV? The reason lies on its stocks price. The higher the value of the stock, the lesser the chances that it will materially fluctuate making it more steady and stable. When the stocks prices are cheap, any small movement on its value is still significantly large as a whole.
In the Philippines, the list of the PSEi benchmark index are considered the blue chip stocks. These stocks are usually in the portfolios of "safe" investors, as these companies have strong balance sheet and earnings statements. Meanwhile, penny stocks are usually the mining and oil companies when it is still on its exploration stage. The risks on investing for these stocks are higher, but the rewards can also be huge. Again, our tolerance for risk will be important in deciding what type of stocks we choose to hold.
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MA traded from P.0500 Oct 15 to P.05700 Oct 19, increasing by .07 or 14% in just one week. In contrast, AEV increased by P.60 from P48.3 Oct 15 to 48.9 Oct 19, but was only up 1.24% for the week. Why is it that a penny stock like MA is more volatile than a blue chip stock such as AEV? The reason lies on its stocks price. The higher the value of the stock, the lesser the chances that it will materially fluctuate making it more steady and stable. When the stocks prices are cheap, any small movement on its value is still significantly large as a whole.
In the Philippines, the list of the PSEi benchmark index are considered the blue chip stocks. These stocks are usually in the portfolios of "safe" investors, as these companies have strong balance sheet and earnings statements. Meanwhile, penny stocks are usually the mining and oil companies when it is still on its exploration stage. The risks on investing for these stocks are higher, but the rewards can also be huge. Again, our tolerance for risk will be important in deciding what type of stocks we choose to hold.
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What You Need to Know About Dividend Dates
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Passive Income Explained
