Blue Chips vs. Penny Stocks – A Guide for New Investors

Are you new to buying stocks and shares? Welcome. Good decision.

The stock market is the only way to consistently invest your money and beat inflation.  That’s why insurance companies and pension funds invest their income in stocks.

Is it risky? Not if you do it right.

Risk vs. Reward

How much risk are you prepared to take? Are you investing your life savings or a windfall you could live without if things go wrong? Can you afford to lose everything you invest?

Caution sign image by Clker-Free-Vector-Images from Pixabay

The bigger your appetite for risk, the bigger potential there is to make quick profits – Equally, the bigger potential there is to lose everything.

Penny Stocks

Penny stocks are shares that are priced in cents or a few dollars rather than hundreds of dollars. Prices are often more volatile, meaning they move up and down more, so the potential is there to make a profit in the shortterm.

Blue Chips

Blue-chip stocks are the big companies whose shares are priced higher. Prices only move fractionally from one day to the next unless there is a major announcement. The potential for short-term gain is minimal, but blue chips will generally grow in price over the long term. These are the shares pension funds buy.

Are You a Trader or an Investor?

Traders plan their stock purchases and sales to make a profit over the short-term. You do need to actively manage your trading account, so if you want a hands-off investment this is not for you.

Traders will often invest in penny stocks because they have a larger potential for gain on a daily basis.

Investors plan their stock purchases to make profits over the long term. They often buy blue-chip stocks intending to keep the stock for five to ten years. Blue chips are less affected by large daily price movements than penny shares, so you do not need to be constantly online to monitor their performance.

Reducing Your Risk

Every investor should minimize their risk. It’s easy to do, you just have to follow common-sense strategies and avoid impulse trades.

Research

You can never spend too much time on research. If you are buying a stock you need to know everything about the company, from the impact of Covid-19, to how much it owes, and its anticipated sales.

Know the stocks to buy now by following the financial news, subscribing to free tip-sheets, as well as one or two paid advice services. These people are paid to know what’s happening. They have years of experience that you can access for a few dollars a month.

Learn how to read financial charts because much of the information you will see comes in the form of candlestick and trend graphs.

Start Virtual Trading

When you feel you understand the market and have researched a few stocks, it is time to start virtual trading.

Most trading platforms offer a virtual trading option where you start with $10,000 of virtual money. Many virtual trading platforms are free, so they offer you a pain-free learning experience while you are still a beginner in stock trading and investing. You could have two or three virtual trading accounts, use different strategies for each, then compare the results.

Diversify

Whether virtual trading or trading for real, you need to diversify your holdings.

Yes, you could invest all your $10,000 in one “hot stock” that was tipped to double in price. If it does double, you got lucky. Equally, a volatile stock could crash and burn, halving your capital.

If you spread your money over ten stocks, the damage you suffer if one stock crashes is limited. Yes, your potential profit is also limited, but as a new investor, protecting your capital should be your first priority.

Plan Your Trades

The stocks you buy might go down in price. What do you do?

Before you buy, you need to work out your stop-loss position, the price you will sell at if the stock I falling. This will mean selling at a loss, but you will limit your losses compared to hanging on and hoping the price will go up again.

Similarly, you need to work out what price you will sell at if the price goes up. This is your take-profit position. It might seem counter-intuitive to sell if the price is going up, but when you sell, you lock in your profit. If you hold on and wait for an even higher price, the shares could crash before you could sell.

Never Hold Penny Stocks Overnight

Buy and sell the same trading day. That way you avoid the risk of anything happening that could destroy the value of yopur shares in the sixteen hours the markets are closed.

Decision Time

Do you invest in blue-chip or penny stocks?

If you are investing your life savings or have limited time to track your investment,  go for blue-chips because they are the safer bet in the long run.

If you are buying stocks with money you can afford to lose AND can find the time to track your investment then penny stocks could give you a bigger short-term gain, as long as you are happy with the higher risk profile.

One way to get the best of both worlds would be to put most of your money into blue-chips and one-third into penny stocks, but you still need to be able to monitor your penny hares closely and to set up automatic selling positions