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Blog : Penny Stocks Can Outperform Blue Chips

March 9th, 2010

Investors may not know too much about penny stocks, but they can potentially be more attractive investments than Blue Chips. Below are a few reasons why penny stocks can make for a better investment.

Ask any investor what type of stocks they own, and you might find many hold shares in Blue Chip companies like IBM and Microsoft.  Blue Chips by definition are securities of large widely held companies that tend to be the leader in their respective industry. These companies are also characterized by a history of dividend payments and other metrics, such as ownership by institutions, in addition to being in sound financial shape. Of course, Blue Chip stocks are not the only type of investment out there.

            Penny stocks can fit nicely into most peoples’ portfolios, although many people do not know much about these lower priced shares and hence do not make them part of their investment allocation. These speculative investments can be more attractive investments than Blue Chips because smaller shares are often undervalued, undiscovered, or just plain out of favor. This can set you up to potentially enjoy a very handsome return.

            Since many analysts on Wall St. follow Blue Chips, there is a plethora of investment research on them. With penny stocks, a particular company may fly under the radar of research analysts and institutions, or just may not be a company that is widely known. However, that does not mean it can’t potentially be a great investment, and one that can be a more attractive investment than a Blue Chip.

Investing in a penny stock is not as simple as finding stocks with the aforementioned characteristics; a company may or may not rise in price ‘just because’ of those reasons. As an investor, you must have a disciplined approach to finding quality companies than can lead to potentially handsome profits down the road. Remember, a penny stock that has good fundamentals and quality management can turn into a Blue Chip stock. Those are the type of investments than can lead to great returns.

As well, penny stocks tend to move quickly in terms of share appreciation. Very rarely does a Blue Chip stock appreciate the way a lower priced share can. If a particular company is undiscovered and at the same time in a business where the fundamentals are strong, an investor can see share appreciation very rapidly, and very often the penny stock can multiply from it’s base.

            Investment choices are numerous, and finding winners is best done with a disciplined approach.  Whatever your selections, keep in mind that penny stocks can be more rewarding, and in less time, than conventional Blue Chips.  This often holds true, and even more so when you get involved with fundamentally solid companies that are trading for very low price points.