The differences between penny stocks and more traditional blue chip stocks are many and are mainly a result of size. The bigger stocks tend to show certain patterns, and the smaller ones have their own patterns as well. You could make a list of penny stocks and see many similarities between the way the stocks act over time, and you could do the same thing with a list of larger stocks. Knowing these differences will make you better equipped to make stronger investing decisions.
The main difference between the penny stock and the traditional market has to do with volatility. The bigger stocks, the ones that represent larger companies, have more to lose and therefore they tend to be more cautious in their movement. Penny stocks, on the other hand, will often explode upwards and then crash downwards, sometimes in the space of a few days or even hours. It is much harder to predict what will happen and long term investments aren’t that practical with the cheaper stocks since they can go down and stay down forever.
Penny stocks represent small companies and it’s harder to predict just what will happen to a smaller company. The result of this unpredictability is an increase in speculation. The larger companies can have their movements anticipated in advanced ways in many cases, but it is more difficult with penny picks. Therefore investors need to make bigger leaps of faith and assumptions when they try to predict how the stocks will move.
You will find penny stocks are not particularly useful in creating an accurate picture of what a company is worth. With larger stocks, the share price is very closely tied to what the company is actually worth. Having more information available means garnering a clearer image of the successes and failures in a company’s financial situation, and this will bring the share prices either up or down, depending on the circumstances. Buying stocks of a much smaller company means you could have shares that are under or over valued, and only time will tell if it is the former or the latter.
Because penny stocks are so different from traditional ones, people are likely to gravitate to one or the other. Younger and more ambitious investors may feel more comfortable putting their money in penny stock choices, whereas older and more reserved investors will likely choose the bigger companies to invest in. There are some people who actually enjoy the unpredictability of how a penny stock can move. Regardless of your reasons, choose the type of investment that you feel most comfortable with.