Blue Chip stocks… Are they really going to make you rich? Simple answer, NO — at least not for most people. I’ll explain why very soon… A lot of the talk in the stock world is usually around penny stocks vs blue chip stocks.
One school of thought thinks penny stocks are better, while the other swears by blue chip stocks. If you’ve followed my blog for a while, you would know I like Penny Stocks and think they’re a great way to invest and make money.
But I’m still often asked my opinion on blue chip stocks — especially from new investors who wonder if it’s something they should look into.
I’m not a fan!
Today, let’s give you a fair view of what blue chip stocks are and how they do as investments for new and young investors.
The objective here is to help you make your own decision about investing your time and money in blue chip stocks. There are many reasons why blue chip stocks can be great for earning wealth. But, we cannot ignore the fact that there are also many disadvantages to them. There was a time when young investors were attracted towards blue chip stocks because they wanted to emulate what tycoons like Warren Buffet were doing and advising. The question is, does their advice apply to small, new investors?
Well, in today’s times even Warren Buffet suggests investing in small companies rather than the big, famous companies that make up blue chip stocks.
In fact, according to CNBC, Warren Buffett says if he had $10,000 to invest, he would be strategic about choosing where to put his money. “I probably would focus on smaller companies because I would be working with smaller sums and there’s more chance that something is overlooked in that arena,” Warren Buffett explained to CNBC, saying he would start examining companies alphabetically and work his way from there.
In today’s times, you don’t need to sort stocks alphabetically, however. You can use different tools to pick and choose which company stocks are best to invest into.
This clearly shows us that the perception of blue chips vis-à-vis penny stocks is changing, and we must keep ourselves aware of which one to go for and which to avoid.
Blue Chip Stocks
A Blue Chip Stock is one that belongs to a large company with a renowned name.
It is generally a stock of a market leader or among the top three companies in its sector (and is often a household name). Because of that reputation, this is considered to be the most common form of investing. Blue chip investments are what a layman would think of when they think of investing. It is the kind of investing that’s portrayed in the media, movies, the news, books et al…
The mainstream media also covers blue chip investing more than anything.
The mainstream media also covers blue chip investing more than anything. And why not, as who wouldn’t want to talk about what the big, famous players are doing? Because people see the big investors doing blue chip investing, they assume this is the only type of investing that exists (or matters).
However, this is just a perception and one we need to break!
Blue chip stocks are traded on major exchanges such as NASDAQ and NYSE…
…usually large-cap stocks, meaning they have a market valuation of $10 billion or more.
Such companies tend to have a good reputation and so the stocks issued by them are highly valued in the market. Blue chips are popular owing to their reliability. Market downturns do affect them, but they’ve shown a tendency to weather these storms and bounce back.
These are definitely less risky than Penny Stocks, but that doesn’t necessarily mean it’s a good thing. But we will get into that shortly.
A penny stock generally refers to the stock of a small company that trades for less than $5 per share.
A large percentage of credible penny stocks trade on the Nasdaq while the rest get traded in the over-the-counter market via the OTC Markets Group. Putting any of your money into penny stocks is a huge risk. But something important to note is that if you do your due diligence and are smart with your approach, you can come out of it making a decent amount of money.
Penny Stocks make up a good chunk of day trading.
They are what I use most often. As someone who has made money in volatile conditions — even in the unpredictability of 2020 and 2021 — I can say with confidence that the volatility of penny stocks is something you can capitalize on.
In June 2020 I turned $70,000 into $1.15 million and made over $4 million total in 2020 alone. That is the power of Penny Stocks. Volatile, but with potential for great returns. The volatility of penny stocks gets often exaggerated by movies, the press, social media influencers, and the like. But it is just that… exaggerated.
Penny stocks are risky, definitely.
And there is so much misinformation that it has created a market where 94% of day traders fail. But penny stocks are not something you need to fear. In fact, it’s quite the opposite.
The risk factor of penny stocks can work in your favor if you know what you are doing. Also, the younger you are, the more money you can risk potentially losing, because you are not nearing the age where your options for earning money from a job or operating a business start diminishing.
This opens you up to be able to make more risky investments, but also opens you up to potentially yielding higher returns from the trades you can potentially make.
Blue Chips Won't Work For You
People who invest in blue chip stocks do so out of the assumption they will hold on to them forever (& get good returns eventually).
Having been in this field for a while, I now realize that the large investors who invest in blue chip stocks are different from young, new investors who want to see some money coming their way. And fortunately, I realized this early on in my career.
Here are some reasons why blue chip stocks don’t work for young investors…
YOU HAVE LESS CONTROL
While day trading and penny stock trading are driven by patterns and statistics and are usually predictable (if you know what you’re looking for), we cannot say the same for blue chips.
Unlike with Penny Stock Trading, there are fewer patterns when dealing with blue chips. The markets are constantly changing and most of the time it’s unpredictable. This means when it comes to blue chip stocks, you can’t rely on specific strategies and techniques. They get impacted by market changes and volatility.
On the other hand, Penny Stocks belong to smaller, newer companies and as such, exist in their own bubble of volatility. So while Penny Stocks themselves are highly volatile and therefore give good chances at a return on investment, they don’t get affected by market events (unless something monumental happens, like a pandemic)
YOU NEED A LARGE ACCOUNT
The world of blue chips is not a level playing field. Buy and hold is the perfect strategy for someone who’s already a millionaire. Or someone who manages a large fund at an investment firm.
It is certainly not for people who have less than $100,000 to invest.
When the amount you invest is large, even a small percentage win makes enough profits. Earning a 20% return on $1 million is a hefty $200,000. Which is great if you have $1 million to invest. But 20% of $20,000, which is what most average people could invest, isn’t that much money. If you keep investing small amounts in blue chips and accumulate small returns, it takes years to see any kind of substantial wealth.
On the contrary, with day trading, you can see significant returns within the first year. To see growth in blue chips you need a VERY large account. As a new trader, you likely don’t have access to such funds.
YOU NEED A TEAM
(AND OTHER RESOURCES)
Managing a career in blue chip stock trading is not suitable for an individual who’s starting out. There’s tons of research required every single day. Enough to make it overwhelming and just not feasible for one person.
In addition, you need to read 10Ks and financial statements, and deep dive into the company history, plans, and strategies. If you do all this yourself you will end up working constantly and won’t have time to focus on your trading.
In order to manage this and thrive, you need a team. And for that, you need money, resources, and time to manage this team.
YOU ARE A SMALL FISH IN A BIG POND
The world of blue chip stocks is inhabited by wealthy investors who have all the resources and time in the world to buy and hold. This is the world that is for people like Warren Buffett, Ray Dalio, Carl Icahn, and George Soros.
They have a lot more money than the average investor and so they are the big fish of this pond. To survive in this world you have to be a big fish.
At present, you are no big fish. You are a small fish that will get completely lost or be eaten up by the sharks of this big pond. In the world of blue chips, you go up against huge investment funds and people with billions to their name. Even when you have $5-10 million, you remain a small fish at the mercy of some of the world’s most powerful people. On the other hand, there are no big fish in the penny stock world. It’s a level playing field!
YOU’RE AT THE MERCY OF QUANTITATIVE TRADERS
Most of the stocks traded in the world of blue chip stocks are done so by large hedge funds. These hedge funds employ sophisticated stock traders who build algorithms to trade in the market with billions of dollars.
Because of this, when you insert yourself into the world of blue chip stocks, you are competing with computers who are much smarter and a lot more disciplined than you are as a human being, because they are operating on programs built into sophisticated code as opposed to emotion, which is what most investors use as a deciding factor in the purchase and sale of their stock investments.
Trading Makes Sense For You
IT’S A LEVEL PLAYING FIELD
Penny Stock markets provide a level playing field. It is the kind of field that has opportunities for everyone irrespective of their education, background, bank balance, and experience.
You don’t have to have generational wealth to make it big in penny stock trading. There are fewer barriers to entry and you can start off with a small amount. As I said before, there are no big fish in the Penny stock market. Large investors tend to not invest in penny stocks.
Penny stocks belong to smaller companies, and because of the kind of amounts they invest, they will just end up owning the entire company. Penny Stock companies only have a limited amount of shares, so if someone comes in and buys too many, they literally end up buying the company.
As these markets provide a level playing field for all, more wealth doesn’t create more power. It is the perfect arena for small-ish players investing similar amounts of money and making large gains. On the contrary, the blue chip stock market is not a level playing field and belongs to the big players like hedge funds.
Penny Stocks have a low entry barrier, meaning almost anyone can enter, and, so long as they know what they’re doing, can double or even triple their investment in just a few months.
START WITH A SMALL TRADING ACCOUNT
When I started, I wanted to trade blue chips and invest in brand names. It didn’t work for me, and it doesn’t work for most people. What works for people like us is what the big players NEVER talk about.
Which is an opportunity for you right now because Penny Stock Trading and Small Caps are some of the best forms of investment you can make (even with a small account).
Starting with a small trading account in penny stocks is absolutely possible. In fact, you can get started with very little money. Within months, you could double or triple your money. Within a year, you could potentially turn $20,000 into a six-figure trading portfolio.
MORE FLEXIBLE (AND EASY TO ADAPT)
It’s easier to adapt to the changes that happen to penny stocks when the market changes.
Since it’s a level playing field, more often than not, Penny stocks don’t get affected by market volatility. But when they do, you can adapt as there are strategies and patterns to fall back on.
This brings us to the next point…
THERE ARE PROVEN STRATEGIES + PATTERNS TO IMPLEMENT!
There are proven strategies and patterns to implement. Day trading isn’t shooting in the dark. It’s a logical way to invest by making forecasts based on statistics.
You have more control and there are clear, predictable patterns that produce returns of 20-35% on a daily basis. Even though I originally thought of starting with blue chips, common sense prevailed and I chose penny stock day trading.
In order to make the best possible use of these strategies and patterns, and to help you adapt, what can prove crucial is having a good mentor.
Of course, there are mentors in the blue chip market as well.
Their advice might work if you’re already wealthy or an institutionalized investor because you have vast sums to invest and a 15-20% return still makes you millions.
A foolproof way to do your best in the penny stock market is to find the right mentor because it equips you with more knowledge and confidence than you’ll ever get by teaching yourself. With the right advice, you can potentially make money trading Penny Stocks and Small Caps. With the wrong advice, you’ll likely lose a lot of money and be worse off than you are now.