Comparing Blue Chip and Penny Stocks III
Considering the differences between penny stocks and the big stockswould help any beginner in understanding more about penny stocks andhopefully profit in investing in penny stocks. Another difference inpenny stocks and blue chip stocks is the ease and cost in which thestocks are acquired. In reality, not all investors have that much moneyto invest. Not everyone can buy high-priced, big shot stocks with $50share price. Large cap corporations have higher share prices therebylimiting the diversity of stocks an investor can own. This is not thecase with penny stocks where share prices are not very high therebyallowing the investor to diversify and own shares of stock fromdifferent small companies.
Maturityand growth of the corporation is also one of the things that make pennystocks different from the big stocks. A corporation’s cycle usuallystarts with an idea or a business plan followed by the raising of thecapital needed to implement the idea or the plan. If enough capital israised then starts the operation and implementation of the plan. If thecorporation ever gets to this stage, company growth starts. Revenuesstart to come and hopefully, they meet the expenses of the corporation.After a significant number of years a corporation matures and expandsto offer other products and services. Revenues turn into earnings anddividends are sometimes given to stockholders. Stocks from large capcorporations are often mature and therefore offer little possibility ofdramatic growth. Penny stocks, on the other hand, are just starting andcan be considered baby corporations. Their potential for growth is highand many investors rely on these potential and wait for the years whenthese penny corporations grow and mature into large cap corporations.It is during these growth phase that great leaps in stock pricesabound.
In connection with thecompany’s growth and maturity, the payment of dividends are alsolacking in penny stocks. Since the corporations with the penny stocksare just starting they often have small or no available cash to expendon dividends. They often use these dividends for further expansion andgrowth. That is why very few, if at all, of these small corporationshave dividends. Blue chips on the other hand, being more mature as acorporation, may give its shareholders dividends. This is still notguaranteed though, as even some large cap corporations don’t givedividends to their stockholders.
Because penny stocks aresmall corporations, they are more prone to takeovers and mergers withother corporations as compared to the more mature, bigger corporations.Penny stocks have been found to be acquisition targets for takeover bya bigger corporation. Takeover of a small cap corporation usuallybenefits the performance of the penny stocks price. Mergers with othersmall cap corporations have also been an often occurrence as a mergershave been found to be indispensable for survival. The effect of thismerger on penny stocks, however, depends on each specific situation andcan either be beneficial or damaging to the penny stock.