After taking a few sips from my cappuccino at a renowned franchise coffee shop, a friend of mine suddenly popped the million dollar question. What is the best combination for stock investment? Is it holding blue chip stocks or is it trading penny stocks? As a beginner, the options lying in front of him had put the most brilliant brain into a twisted dilemma.
I cleared my throat and clarified a few things. First of all, neither of the answers were correct nor wrong. Based on the records, many successful traders who have traded penny stocks eventually reaped huge profits. On the contrary, many seasoned investors have flourished by holding blue chip stocks over a long period of time. For instance, the investor gurus such as Benjamin Graham, Warren Buffett and Peter Lynch. My friend was bewildered and demanded further explanation.
"It depends on your characteristics," I told him. I resumed my explanation by dividing the investors into the stubborn investors and punters. The stubborn investors are those who have carried out well research on the fundamental and the earning of the companies. They commonly buy shares because they long to own the companies and they earn money through dividend payout, right or bonus issues and potential gain throughout the years of holding the companies. Typically, stubborn investors will choose blue chip stocks because the companies have expanded to gigantic size and most probably the leaders in the industry. Blue chip stocks are less volatile in term of share price and they are enjoying stream of incomes from one or many businesses. These stubborn investors are normally experienced investors with plenty of cash in hands.
On the other hand, the punters are investors who use trading to gain profit in term of capital gain. Simply put, they would have bought shares at low price and sell the shares at higher price to make money. Equipped with less capital in hands, the punters purchase penny stocks to minimize the cost and to gain maximum profit. They will opt for the companies which are mediocre in size by now but these companies are heading towards the fast track of growth in the future. Punters trade with the help of technical analyst to gain the best timing for buying and selling.
At the end of our conversations, I asked my friend to consider what kind of investor he decided to become. I also asked him to assess himself in term of risk tolerance. If he could tolerate higher risks for higher return, then he should choose to become a punter. Otherwise, if he has less appetite for risk and returns, then he should play safe by becoming a stubborn investor instead. For me, I choose for a blend of a stubborn investor and a punter. I put 80% of my portfolio into blue chip stocks and 20% into penny stocks. Using this method, I can enjoy both stable income and occasional surprise of windfall profit.
watch some videos:
look out for the sunglasses:
watch some videos:
look out for the sunglasses:
