One day, I had been to dinner with one of my close friend’s Sara. We started gossiping about almost everything in the world and finally were to start talking about investments.
Even before talking about our portfolios, Sara exclaimed, “As an accountant by trade, my work for Blue Chip companies took me all over the world”!
Her eyes were twinkling, with this gesture I understood its time that I should include Blue-chip stocks in my portfolio as well!
But I didn’t really care about Blue Chip stocks for my portfolio was populated with Penny stocks and I was an Investor by every means!
And then our conversation started and I really felt the need to include both of them in my portfolio.
Here is what you need to know about our gala conversation.
Let’s break the ice first;
Blue Chips Stocks and Penny Stocks might seem like cool jargon but these are commonly used terms in the stock market.
Each of these two stocks has its own edge and pitfall.
Investors focus on stocks fulfilling the parameters of dividend-paying and low risk, keeping in mind these factors Blue chip and Penny stocks seems to be a perfect fit.
Let’s understand the two types of stocks in more detail…
What are the Blue Chips Stocks?
Are they blue in colour?
Are they in the form of Chips?
It’s a funny name but Blue Chips Stocks rather represents gigantic and well-established organizations that have been operating for years.
The history of such companies having a funny name is interesting, it has been derived from the game of Poker where Blue Chips are considered as the most expensive Poker Chips.
For translation in the stock language, when investors start looking for quality stocks that hold their value, they stumble upon Blue-chip stocks!
The Indian Blue Chips Stocks include TCS, Reliance Industries, ONGC, ITC, HDFC, Coal India, Infosys, Sun Pharma, ICICI Bank, SBI Bank.
Also, these stocks have a high weightage in the index.
The market capitalization of these companies is humongous, usually in billions.
Since the establishment is ages ago, it builds trust among people and ensures that the money of these investors is in safe hands.
Since trust is intact Investing in these companies seems hardly risky.
Almost every expert/investor/trader keep a keen eye on the Blue-Chip company stocks.
Investors stress the valuation of the Blue-Chip stocks because there is a great deal of future potential of these companies for the current price in the market.
Many blue-chip companies are overrated because their fundamentals are extremely strong and therefore investors trust the business of the company.
Such companies are ‘Too-big-to-fail’ in India as they have survived every economic/natural/monetary storm and sailed with a profitable business with providing dividends to the shareholders.
But my dear folks, this is not always true!!
Remember the not so cool story of Satyam?
Would you be surprised if I say it, was a blue-chip company!
What does it take to call a company, ‘A Blue Chips Companies’?
When a normal company is bestowed with ‘Blue-chip company’, it gains recognization for being a risk-free investment for the investors.
Remember these companies are matured but is not placed at the end of the life cycle graph, large-scale companies and also the champion in their respective sector and their future growth are steady but not fast.
These companies are characterized by the following parameters:
- Large Market Capitalization
- High Valued by the Market
- Popular Brand Name
- Good financial health
- Record of long-term and stable growth
- Good Creditworthiness
- Old and Reputed Companies
- More weight in Indices
- Better Investment Grade
- Consistent Dividends
These parameters mean a Blue- Chip company is highly profitable; it enjoys a good credit rating in the competition arena and not to forget about its super-high dividend pay-outs.
It is not always sunny days for a blue-chip company, for even they are affected by the highs and lows of the market.
In spite of this, investors prefer such stocks because they tend to recover faster than other quality stocks.
This characteristic makes investing in Blue Chips Stocks risk-free and safer for the long-run perspective.
So what are Penny Stocks then?
Penny stocks are categorized as shares of small public companies that trade at comparatively low prices.
According to Indian terms, the stocks which trade in the range of (Rs. 20 – Rs. 25) in the market are called Penny Stocks.
These companies are usually new entrants with low market capitalization.
Investing in the Penny Stocks, compared to Blue-chip stocks is highly risky, distinctively volatile posing a higher reward or huge losses.
Before investing in Penny Stocks, an investor needs to understand the market condition before entering into a trade.
Does a Penny Stocks become ever become Big?
Without any doubt, they do grow huge!
Indian Penny stocks companies are as follows Eicher Motors, Kotak Mahindra Bank, UPL, Lupin and Titan.
I hope you won’t be surprised if I say these companies are part of Nifty50 today!
They contribute as heavy weightage shares in the index.
There are some Penny stocks in the market that made investors millionaires: Bajaj Finance, Shree Cement, Gruh Finance are some of the renowned names.
There are well-known experts known as penny stock specialists specialized in picking leading penny stocks over time.
Ashish Chaug is one of them!
I had been holding Penny stocks in my portfolio for most of the time!
It’s been an erratic journey, therefore here are some points I wanted to let you all know before considering investing in Penny Stocks:
Being a risky pick it’s an explosive move in almost every turning point!
Therefore, it is evident to have it is important to have a thorough understanding of the business of the company you would be purchasing.
With technology advancement and screener usage, one might get the best penny stock alerts but there is various aspect still to consider before deciding on making an investment.
As an investor, your first job is to accumulate as much information on the company/business as possible.
Data points about the company’s balance sheet, stakeholders, backers, etc. need to be analysed from a long-term profitability perspective.
Remember, the lower the debt the better, which won’t affect the long-term profitability of the company.
Always go for liquid Penny Stocks which are traded frequently (high volume trading).
Identify the triggering points for the business, which might mean understanding the product, the company’s new launches, game-changing factors etc.
This would help an investor that the company in the literal sense is taking efforts for expanding or grow its business.
Penny Stocks and its short-lived love among investors
Usually, companies with Pеnnу Stock being a new entrant are at a higher risk of competition.
Therefore, eventually, if they don’t adapt to the constantly changing market they get kicked off of the competition even before entering into one.
Penny stocks have a bad impression in the media because history stands witness to such Penny stocks falling prey to schemes and vanishing from the list eventually.
While investing in penny stocks, as an investor is our duty, too not fall prey and do our due diligence against unethical practices and асtіvіties which includes scammers.
But how would you understand which one to opt for?
Is it Blue Chip or Penny Stock for you?
Investing is a subjective topic.
It depends on your goals, risk appetite and financial plans.
If you are comfortable taking risks then why not Penny Stocks?
But if you have second thoughts and are not so confident about taking risks, my dear friend Blue-chip companies is for you!
If you seek a Fund manager’s aid in understanding which is the best for you, they would most probably ensure that there is an adequate proportion of both included in your portfolio.
Guess what, had agreed to invest in Blue-chip and without being an account like my friend Sara I can fly all around the world!
What about you?
Not the flying part!
I’m asking about your investment!
Would love to know about it!
Until next time…