Depending on their liquidity, traded volumes, spreads, and volatility, there are three types of stocks: blue chips, mid-caps, and small-cap stocks.
- Stocks of the first group are very popular from the investment point of view. They are marked by tight spreads, high liquidity, low volatility, and quite big daily traded volumes. These are stocks of such famous companies as Apple, Amazon, Facebook, Netflix, etc.
- Mid-caps are less interesting to investors because they have lower liquidity and smaller traded volumes. In addition to that, the spreads are wider.
- When it comes to small-cap stocks, they are considered the least liquid assets, which offer very large spreads, extremely high volatility, and the smallest traded volumes.
Traders that trade stocks can be also divided into several different categories:
- Passive. They prefer to trade stocks of the first type (less often – second or third); their priorities are reliability and stability.
- Active. These ones strive to increase their profits along with minimizing risks, that’s why they mostly trade “blue chips”, but do not ignore mid-caps and sometimes even small-caps stocks as well.
- Speculators. These are traders, who are into short-term buying/selling stocks in order to gain profits very quickly, hence they choose the most liquid stocks, "blue chips".
The choice of stocks can be influenced by a trader’s strategy and attitude towards risks. It is well known that stocks of famous companies don’t always yield a lot of profit, but they involve the least risk. Moreover, it is not recommended to invest all funds in one asset. It would be better to diversify your investment portfolio by forming it out of stocks of different companies.
"Blue chips" are the most reliable and liquid instruments, that’s why they are considered the best for all traders, even beginners. At the same time, mid-caps and small-caps stocks require you to have some skills and experience, so you should be very careful with them.