Comparing Blue Chip and Penny Stocks II
Other than speculation, predictability and value, available information and fundamental analysis, there are also other factors that make penny stocks different from the more conventional, blue chip stocks. One of these factors is the ability to conduct technical analysis. To recap, technical analysis is done by examining past price movements to find any patterns or trends to help in predicting future stock price behavior. This prediction or analysis will then be used in buying and selling stocks. Technical analysis is relatively easier in the big stocks than in penny stocks. Information abounds about major stocks that would enable a technical analyst to make price charts and price behavior predictions. They also make these predictions highly accurate. This is different from penny stocks where there are no or very difficult to obtain past price performances. Because of this, penny stocks are very difficult to technically analyze and have very low accuracy in price movement predictions.
Volatility is another major difference between blue chip stocks and penny stocks. Volatility is the propensity of the stock to fluctuate and change prices. Penny stocks are very volatile and can be easily influenced by a number of factors. They fluctuate in big percentages in a day and are often because of large sales or buys from investors. This is different from big stocks that are not very volatile as compared to penny stocks. Blue chip stocks are more stable and produce less dramatic price changes in a day as compared to penny stocks with stock price increases of 20%, 50% or even 100% in just one trading day.
Because conventional stocks are traded in major stock exchanges with more investors trading, spread differences in stock prices are minimal if not negligible. A spread is the difference between the bid (the price the buyers are willing to buy stocks) and the ask (price the sellers are willing to sell stocks). A stock quote shows the last matched up bid and ask prices of the stocks. The situation with penny stocks is different, however. Because penny stocks are traded less and the investors are also less, the bid and ask prices tend to be far apart therefore giving big spreads. Penny stocks often have spreads that are any where between 15% to 30% of the penny stock price.
As you may have already heard, the risks involved in penny stocks can be more significant than the risks involved in big stocks. Penny stocks, being from smaller corporations, are more prone to go bankrupt, stop its operation, or lose money than the other big corporations. Many investors that have unwisely invested in too much penny stocks lose a significant percentage, if not all, of their investment in penny stocks. This is different from blue chip stocks that are more stable investments and are less likely to go bankrupt than penny stocks. The upside of penny stocks, however, is that they offer more rewards than ordinary blue chip stocks. Once a penny stock booms, its stock price rockets to a degree that cannot be matched by any conventional big stock.