Penny Stock Basics Terminology

Penny Stocks & Blue Chip Companies

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If You Buy Penny Stocks You Should Also Know Basic Terms Lik What Is A Blue Chip Company?

You can commonly describe public companies as large-cap or small-cap. And penny stocks are definitely small-cap stocks or even less. However, there is another way to define bigger and more established companies. They can be called blue-chip companies.

These are companies like P&G that sell high amounts of top products that consumers have accepted in their everyday lives. Because of this, a company like P&G (PG) can survive most market downtrends or a bad quarter here and there.

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This means that blue-chip companies have a track record of stability and the capability to survive. Many of these, unlike penny stocks, may also offer dividends to investors.

These are a share of profits and are issues based on a “per share” figure. Though most penny stocks don’t declare a dividend, there are a few, however, that will. But there are more Blue Chip stocks with dividends as compared to cheaper stocks deemed as penny stocks.

If You Buy Penny Stocks, Understand What Blue Chip Stocks Are Too

This site focuses on certain penny stocks to watch. We also want you to know some of the basics before you decide to journey into penny stocks to buy. But, when you think about it, the term “blue chip” is kind of a random way to describe a company.

In actuality, the story behind the term is quite fascinating. It’s a term that was originally used to describe the most valuable poker chip. It was then used in 1923 for high-priced stocks by Oliver Gingold. Compared to 1923, blue-chip stocks no longer represent only high-priced stocks but stocks that are high-quality. 

Where And What Are Blue Chip Stocks?

Because blue-chip companies are very high-quality you are most likely going to find them on the larger exchanges. These include the Dow Jones, S&P 500, and NASDAQ. Since blue-chip stocks are no longer solely evaluated by price, “blue chip” standards are up for debate. However, blue-chip companies usually need a market capitalization of $5 billion or more.

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We discussed earlier that blue-chip companies are able to withstand the test of time and economic uncertainty. The way a lot of these companies are able to do that is thanks to their international presence. Multinational companies like Disney (DIS) and McDonald’s (MCD) are industry leaders that survive global economic struggles, making them stable for investor portfolios.

Blue-chip stocks have the distinct advantage of having an institutional status in the economy. This is advantageous for these stocks because it allows them to generally have less volatile compared to other stocks. That’s especially true when compared to penny stocks. Furthermore, blue-chip stocks are very liquid which is important for investors who need to get cash quick.

When traders have to do fundamental analysis on blue-chip companies, it shows how they distinguish themselves from other companies. These companies have virtually no debt, large market capitalizations, strong return on assets, and impressive debt-to-equity ratios. These strong fundamentals combined with good liquidity allows blue-chip stocks to have investment-grade bond ratings.

Blue-chip stocks are very easy to keep an eye on. There are blue-chip indexes like the Dow Jones Industrial Average that make it simple to track certain stocks. Coincidentally, monitoring these companies is generally a good way to monitor entire industries. This is because the strongest companies in any given industry can mirror “blue-chip” companies.

Who Likes Blue Chip Companies?

Most investors will have money in one of these companies. However, they are most appealing to investors who have extremely conservative tendencies. These types of investors have low-risk portfolios that slowly bring back returns and dividends.

Needless to say, these also tend to be people that are planning on retiring. Blue-chip company dividends are one of the most appealing features for these types of stocks. A lot of them have consistently given stockholder dividend returns and some have consistently increased those dividends every year.

Blue Chip Stocks Are Generally Safe

While a lot of blue-chip stocks have survived economic turmoil and bad quarters, some have not. This means that investors still need to be careful when deciding which blue-chip stocks to buy.

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One such example came during the 2008 housing crisis. Lehman Brothers was considered a blue-chip stock and disappeared in the aftermath of the crisis. It is not a typical occurrence, but it does happen.

Blue-chip stocks should also not comprise your entire investment portfolio. Any strong portfolio has a strong amount of diversification. A few mid-cap and small-cap stocks do not hurt someone’s portfolio and can also bring strong returns depending on the stocks to buy. You should also consider purchasing bonds and keeping cash on hand. The moral of the story is you can never be too safe when securing your financial future.

By J. Phillip

I stay on the cutting edge of industry and enjoy finding out about new companies that major outlets and funds haven't heard of (yet). Most of the time you can find me deep in the corporate filings, focusing on fundamentals that could be behind the next big move in certain stock.

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