Comparing Penny Stocks to Their Blue-Chip Cousins

Many differences exist between penny stocks and higher-priced shares. By being aware of how smaller companies and their lower-priced shares behave, you can position yourself in the right kinds of companies and make better trading decisions. More important, you’ll have an idea of whether this type of investment is for you.
Investors typically organize stocks into the following categories:
 Large cap companies, also known as blue-chip stocks: Any company whose shares value them at $5 billion or more are known as large capitalization companies, or large caps for short. Some investors use the value of $10 billion as criterion for the large cap criteria moniker while others use different criteria.
Shares of the biggest companies, which are valued at billions of dollars, are known as blue-chip stocks. Many of these companies are household names, such as IBM, McDonald’s, Disney, and Exxon, and trade on the New York Stock Exchange (NYSE) or on other major stock markets.

 Mid cap companies: The term mid cap is short for middle capitalization, but you’ll probably never hear the long version of the name. These companies are typically valued between $500 million and $5 billion, but again this depends on who is providing the definition.
 Small cap corporations: These companies have total values of between $50 million and $500 million.
 Micro caps, also known as penny stocks: Any company whose total value is less than $50 million is considered a micro cap. Because penny stocks typically represent smaller, growing corporations, they’re often in the micro cap category. This category of stocks reacts to situations that are unique and material to it, even when the same events would have little impact on much larger companies.
Although micro caps are much like blue-chip shares, only smaller, they play by their own set of valuation and price behavior rules. To become consistently successful trading penny stocks, you need to understand this concept and the specific ways in which these micro cap shares behave.

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