Differences: Big vs. Small Stocks

There Are Several Differences Between Big Corporations and Small Stocks

Stock Market Charts Are Useless
Stock market charts receive a lot of attention but for long-term owners, they are all but useless; meaningless scribbles that bear little relation to actual past performance. molotovcoketail / Digital Vision Vectors / Getty Images

Disclosure:  As the expert on tiny, speculative investments, I have a very one-sided view on this topic.  Nevertheless, I will present both sides, since risky, volatile penny stocks are certainly not for everyone.

Blue Chip investments are very different from penny stocks.  However, they are also very similar.  

After all, they both increase in value when the underlying company grows, just like they both drop towards lower share prices when things don't go as well.

 They are both prone to risk, volatility, and speculation.

The real differences appear when you look more closely at those factors mentioned above.  Sure, penny stocks can lead you to some much larger or quicker profits, but you'll be facing much larger and quicker risks!

Quality of Corporation

Like anything, you get what you pay for.  Higher-priced stocks are usually trading at higher levels for a reason.

Whether they have massive piles of cash, own multi-million dollar factories, or see revenues coming in by the tens or hundreds of millions, their share price will reflect that stability.  On the other hand, penny stocks often have no revenues, own nothing, and may be rapidly losing money.

We need to be careful not to paint all penny stocks with one brush, or treat all larger corporations as equal to one another.  There are plenty of businesses trading at 20 or 50 cents which have no debt, tons of sales, and a great product being sold internationally.

 The trick is knowing how to find them.

Of course, there is typically lower upside the larger the company.  You won't see IBM double in price in a month, but you could see plenty of smaller stocks do exactly that.  The larger something is, the more energy it takes to move it.

Speculation vs. Earnings

Lower-priced and younger companies typically see their shares get valued based on speculation.

 What do investors think the business could eventually, potentially do one day?  They based the amount they are willing to pay for the shares on that philosophy.

On the other hand, the share prices of big stocks are usually valued based on their earnings.  Investors pay more for the shares, the greater the profit potential of the underlying company.

Stage of Corporate Life Cycle

Businesses have a life cycle; concept; establishment; growth; maturity; decline.  They start out new, where their main focus is on their proof-of-concept phase.  As they start seeing revenues, they enter their growth phase.

Eventually, the business reaches maturity, and many years (or decades) later they enter the slow decline.  Much like the human life cycle, businesses grow, mature, and then fade away.

You can probably guess that most penny stocks and low-priced shares (usually) are in the earlier phases of their path.   On the other hand, the biggest corporations are much further along in their life cycle - after all, it probably took many decades to get that large!

Stability

When a tiny company gets hit with a lawsuit or loses a major client, or has weak financial results, their shares can tank.  On the other hand, you won't see a big corporation like McDonald's or Exxon notice if they lose a few customers, or get hit with a couple of court cases.

There are many differences between small and large stocks, but those mentioned above may be some of the most significant.  After deciding to invest at all, you need to gauge what type of shares you believe will give you the greatest trading results.  Using the points above may help.