Penny stocks are shares of small publicly traded companies, while large-cap stocks refer to those of big companies like Mastercard, Novartis, and PayPal, among others. In this article, we will look at the key differences between trading penny stocks and large-cap companies.
Penny stocks vs large-cap stocks: What are they?
Penny stocks are the relatively small publicly traded companies whose share price trades for less than $5. Some of these companies are typically small in nature, while many others are companies that used to be large but fell out of favor with large investors.
For example, companies like AMC Entertainment and GameStop were penny stocks before the Wall Street Bets euphoria. AMC stock was trading at less than $2 in January 2021 since investors were ruling out its survival because of the lockdowns imposed by governments.
Similarly, GameStop shares were trading at less than $2 because of the shift happening in the gaming industry, where more people are buying games online.
All large-cap stocks in the United States are listed at the New York Stock Exchange (NYSE) or the Nasdaq. While some penny stocks are listed in these exchanges, many of them trade in the over-the-counter (OTC) markets. They prefer the OTC because of their small size and the fact that many of them don’t meet the requirements of the big exchanges. Also, these stocks don’t have to comply with securities laws since they are traded directly.
OTC Markets Group is the biggest player in over-the-counter listings. The company operates OTCQX, which is an exchange whose members are reviewed by the OTC Group. It also operates OTCQB, which is an exchange that requires an annual certification of the company. It also owns pink sheets, which is an open market platform that has no reporting obligations.
Differences between penny stocks and large-cap stocks
There are other differences between penny stocks and large-cap stocks. First, most penny stocks neither pay dividends nor buy back their shares. This is simply because most of them are tiny and unprofitable companies. On the other hand, many large-cap companies like Microsoft and Johnson & Johnson pay safe dividends and buy back their shares.
Second, many penny stocks are not followed by Wall Street analysts because of how small they are. As such, traders don’t know the ratings of these companies. This is unlike all large-cap stocks that have tens of analysts following them. Therefore, as an investor, these analyst reports can help you identify potential catalysts and risks.
Third, many penny stocks are small companies that focus on local markets. Investing in them does not give you exposure to the fast-growing international markets like China. On the other hand, many large-cap companies like Apple and Microsoft are highly diversified companies that make substantial revenue from the international market.
Further, many penny stocks are owned mostly by retail investors, while institutions are the biggest holders of large-cap stocks. For example, the chart below shows that the biggest holders of a company like Target Corporation are companies like Vanguard Group, Blackrock, State Street Corporation, and Bank of America, among others. Since institutions rarely sell, large-cap stocks are less volatile than penny stocks.
Another difference between penny stocks and large-cap stocks is in manipulation. In most cases, it is almost impossible for a single investor to manipulate large companies like Microsoft and Apple because of how big their market capitalization is. On the other hand, it is common for single entities to manipulate penny stocks that have a small market cap.
Examples of large-cap and penny stocks
There are many large-cap stocks in the United States. Some of the best-known large-cap companies are firms like Nvidia, AMD, Walmart, Berkshire Hathaway, and PayPal.
Similarly, there are many small companies in the market today. Some of the best-known penny stocks are companies like Standard Lithium, Hut 8 Mining, Columbia Care, and Bragg Gaming Group.
Penny stocks: pros and cons
There are several benefits of investing in penny stocks. First, the share prices of these companies are low, which means that you can buy more with less capital.
Second, it is possible to buy a company on the cheap and see it recover. A good example of this is a company known as GoPro. At its peak, the company was a fast-growing tech company. In 2014, the shares soared to an all-time high of almost $100. It then dropped to $1.98, effectively becoming a penny stock. Between March 2020 and June 2021, the stock rose by more than 400% as the company launched a turnaround strategy.
GoPro stock price
AMC is another good example. The shares dropped from $38 in 2015 to $1.96 in 2020 during the pandemic. The stock then jumped by more than 1,250% between January and June 2021.
AMC stock chart
On the other hand, the top cons for investing in penny stocks are that they are rife with market manipulation and the fact that most of them don’t distribute dividends to their shareholders.
Large-cap stocks pros and cons
There are several pros and cons of investing in large-cap companies. First, the companies are usually stable, unlike penny stocks that are known for their volatility. Second, many of them reward their shareholders through regular dividends and buybacks.
Third, these firms are followed by many analysts, meaning that researching more about them is easier. For example, you can easily find their analyst call transcripts. Finally, these companies have higher management standards than penny stocks.
On the other hand, the share prices of most large-cap stocks tend to be unaffordable to most small investors. For example, the stock price of a company like Berkshire Hathaway is more than $200,000, meaning that it is difficult for a small investor to buy it directly. Also, many large-cap stocks tend to experience small movements within a long time.
Large-cap stocks and penny stocks are popular forms of equity investments. Many large investors prefer buying stable and cash-generating large-cap stocks like Amazon and Google. There are other small investors who have succeeded by investing in penny stocks. In this article, we have looked at the pros and cons of both.