Depending on their traded volumes, liquidity, volatility, and spread values, stocks can be divided into three groups: blue chips, mid-caps and small-caps.
Blue chips are commonly believed to be the most reliable and liquid. These are stocks of major global companies, such as Apple, Microsoft, Google, Coca-Cola, IBM, General Motors, etc.
Mid-cap and small-cap stocks are less liquid although they can sometimes be more promising.
Securities of famous companies do not always yield the highest profit, however, when it comes to investments, they are considered the least risky if compared with mid-caps and small-caps. It might be a wise decision to create a portfolio that consists of assets of different types.
More conservative traders prefer to trade stocks of American companies because the US market is thought to be more stable and liquid over the past decade. But certainly, if you want to try some "exotics", you can add some European or Japanese stocks to your portfolio.
Traders who are interested in trading stocks are divided into three categories:
- Passive (for reliability and stability), who prefer "blue chips"
- Active (for the highest possible profit with moderate risks), who mostly prefer "blue chips", but could also go for mid-caps and small-caps
- Speculators (for early income, short-term buying/selling), who choose the most liquid “blue chips”
Being more reliable and liquid securities, “blue chips” may be considered the ultimate instruments suitable for all traders who are interested in trading stocks regardless of their strategies. It’s important to understand that trading mid-cap and small-cap stocks requires traders to have advanced knowledge and impressive experience in trading on the financial markets. It is not recommended for beginners to add them to their portfolio, because injudicious actions may result in loss of some or all of their investments.