Stock investments can vary in many ways, such as their market value and size, and there are a variety of terms used to describe them. For example, the term "blue chip" refers to stocks of companies that are well-known in the market and are considered financially secure. They tend to have high valuations due to their long record of growth and profitability. The term "micro cap" applies to stocks with outstanding share value ranges between $50 million and $300 million. These stocks tend to be riskier and more volatile than blue chip stocks.
Features of Blue Chips
Blue chips tend to be large companies that have been in business for a long time. Such companies have survived various economic downturns and achieved various successes throughout their histories. The term “blue chip” is borrowed from the game of poker and the colored chips used to place bets during a game. Blue chips represent the highest value. An investment in blue chip stocks is suitable for conservative investors because the stocks tend to have less volatility, reliable growth and stable returns.
Blue Chips in the Stock Market
To find examples of blue chip stocks, you can review a major stock index, such as the Standard & Poor’s 500 Index, which lists 500 of the largest companies found in the U.S. stock market. Stocks are included in the index on the basis of industry, liquidity and market size. Most of the stocks in the S&P 500 are blue chip stocks and their activity is considered a representation of the market as a whole.
Features of Micro Caps
Micro caps are smaller than blue chip companies and are usually companies that have not been in business for very long. Their smaller market capitalization -- or the market value of the company’s outstanding shares -- of $50 million to $300 million make these stocks riskier investments than blue chips, the market capitalization of which exceeds $10 billion. Their higher risk profile gives an investment in micro caps the potential for very high returns or losses. If you can tolerate the risk and volatility, micro caps can be a wise investment.
Micro Caps in the Stock Market
Micro caps can also be found on a stock index, such as the Russell Microcap Index, which lists 2,000 small cap and micro cap stocks. This index includes the smallest securities that meet exchange listing requirements. Over-the-counter-- or OTC -- stocks and penny stocks can also fall inside the micro cap universe if their market capitalization level falls within the appropriate range.
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