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Stocks in the market can be classified by the size of their market capitalization. This classification is useful for defining the baskets of different stock indexes, and it also makes it easier to analyze shifts in market money flows. Let’s look with Green Chart at the 3 main groups of stocks by market capitalization in the article below.
What Are Blue-Chip Stocks?
Blue-chip stocks are stocks with a large market capitalization (usually above VND 10,000 billion in Vietnam) and sound finances. They are often the stocks that represent an industry or a country’s whole stock market.
The term “blue chip” comes from casinos, where blue chips have the highest cash value.
Because blue chips are stocks of industry-leading companies with solid finances, they are very safe. In addition, to reach such a large capitalization, a company must already have gone through a period of strong growth and beaten its industry peers to take the lead. So these are usually companies in industries that have moved past their growth phase or reached maturity. Examples of blue-chip stocks include VIC (Vingroup), VNM (Vinamilk), VCB (Vietcombank), HPG (Hoa Phat)…
These companies usually generate stable revenue and profits thanks to sustainable business models and strong governance. They therefore aim for steady long-term growth, and so do their share prices, which tend to rise over the long run. Trading blue chips over the short term rarely delivers high returns.
In addition, thanks to their financial health, safety and large market capitalization, blue chips also trade at high valuations. Their P/E and P/B ratios are almost always above the market average. This also means lower expected returns, making the stocks less attractive.
Another very important feature of blue chips is that, because of their large market capitalization, they carry a lot of weight in benchmark indexes (in Vietnam, you can follow blue chips through the VN30 index). So besides company fundamentals, these stocks are very sensitive to macro news and highly correlated with the overall market.
So blue-chip stocks suit investors with a low risk appetite who want steady long-term returns. Their safety also makes them the top choice of investment funds in the Vietnamese market.
What Are Penny Stocks?
In contrast to blue chips, penny stocks are shares of small companies with small market capitalizations (usually below VND 1,000 billion). The name comes from British currency: a penny is just 0.01 pounds sterling, the smallest unit of currency in the United Kingdom.
These companies are usually young, or struggle to grow because of erratic revenue and profits and an inability to compete for market share with their peers. As a result, penny stocks are very risky.
For the same reasons, few investors choose penny stocks, and some small companies are barely known at all. So penny stocks have low trading volume and poor liquidity. This is a risk to watch closely when trading them, because you may be unable to sell at the price you want and have to accept a loss, or even lose everything.
Penny stocks are usually very cheap, sometimes below the par value of VND 10,000 per share, which is why many Vietnamese investors jokingly call them “iced-tea stocks” (as cheap as a glass of iced tea). Such high-risk stocks typically trade at lower valuations than the overall market, with P/E ratios usually below average.
While blue chips have usually come through their hot-growth phase and entered a stable one, small-cap penny stocks have more room to grow and develop. Despite the risks, if you have a good grounding in fundamental analysis, you will know how to pick penny stocks to add to your portfolio, and they can deliver higher returns than other stocks. Even so, penny stocks should make up only a small part of your portfolio.
In Vietnam, you can follow penny stock price movements through the VNSMALLCAP index.
What Are Midcap Stocks?
Midcap stocks have a medium market capitalization (usually from above VND 1,000 billion to below VND 10,000 billion), smaller than blue chips but larger than penny stocks. So their characteristics fall between the two groups: medium risk and return, with P/E ratios close to the market average. In Vietnam, midcaps are usually the main components of the VNMIDCAP index – the top 70 stocks ranked after the 30 leading stocks in the VN30.
In practice, midcap stocks usually belong to companies on a growth path, with a stable foundation and strong growth potential. Midcap share prices are typically mid-range, affordable for many investors and easy to buy. Compared with blue chips, midcaps are much cheaper and offer more volume for traders to choose from.
Midcaps are also fairly liquid and safer than penny stocks, because these companies are still growing and attract investors large and small, bringing strong buying power and high trading volume.
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