Penny Stock

B is correct. This stock trades below $5 per share, classifying it as a penny stock. Penny stocks are high-risk, speculative investments characterized by high volatility, manipulation risk, limited analyst coverage, and minimal regulatory oversight. These characteristics directly conflict with Robert's capital preservation objective and limited risk tolerance. A capital preservation objective prioritizes safety of principal, making penny stocks fundamentally unsuitable regardless of allocation percentage.

A is incorrect because low share price does NOT mean limited downside risk. Penny stocks can lose 100% of their value, and the $2.75 price provides no downside protection. The risk comes from the company's fundamentals and market characteristics, not the nominal share price. C is incorrect because even a small allocation is unsuitable when the investment directly conflicts with the client's stated objective. Suitability is not merely about position sizing—it requires alignment between investment characteristics and client objectives. D is incorrect because OTC stocks (especially penny stocks) do not inherently offer better growth potential; they offer higher RISK, which is inappropriate for this conservative client.

C is correct. Penny stocks are defined as equity securities trading below $5 per share. This threshold applies regardless of where the stock trades (OTC markets or exchanges), though most penny stocks trade on OTC markets due to their inability to meet exchange listing requirements.

A ($1) reflects the common misconception that "penny" stocks must trade for literal pennies, but the threshold is actually $5. B ($2) is not the correct threshold for penny stock classification. D ($10) is too high and would incorrectly include many legitimate small-cap and mid-cap stocks that trade on major exchanges with full regulatory oversight.

A is correct. Penny stocks and micro-cap stocks use different classification criteria. Penny stocks are classified based on PRICE (any stock trading below $5 per share), while micro-cap stocks are classified based on MARKET CAPITALIZATION (companies with market cap under $300 million). These categories can overlap (a micro-cap stock might also be a penny stock), but they are distinct classifications.

B is incorrect because they are not the same. A company could have a market cap of $500 million (making it a small-cap, not micro-cap) but trade at $3 per share (making it a penny stock). Conversely, a company with $100 million market cap (micro-cap) could trade at $25 per share (not a penny stock). C is incorrect because penny stocks are NOT defined by market cap thresholds. The $5 price threshold is what defines a penny stock. D is incorrect because both penny stocks AND micro-caps can theoretically trade on any market, though both typically trade on OTC markets due to difficulty meeting exchange listing requirements.

C is correct (the EXCEPT answer). Penny stocks do NOT always have market caps below $300 million. Penny stock classification is based solely on PRICE (under $5 per share), not market capitalization. A company could theoretically have hundreds of millions of shares outstanding, giving it a large market cap, but still trade at a penny stock price. The classification is based on share price alone.

A is accurate: Penny stocks are defined as stocks trading below $5 per share. B is accurate: Penny stocks typically exhibit higher volatility than large-cap stocks due to limited liquidity, lower institutional ownership, sensitivity to manipulation, and higher company-specific risk. D is accurate: Most penny stocks trade on OTC markets (such as OTC Pink or OTCQB) rather than NASDAQ or major exchanges because they cannot meet exchange listing requirements for financial reporting, minimum price, or shareholder base.

A is correct. Only statements 1 and 3 are accurate.

Statement 1 is TRUE: Penny stocks often have limited or no analyst coverage because research firms focus on larger companies with higher trading volumes and commissions. Many penny stocks are followed by zero professional analysts, leaving investors with minimal independent research. Statement 2 is FALSE: Penny stocks have LOWER liquidity than large-cap stocks, not higher. Low share prices do not create liquidity—liquidity comes from trading volume and number of market participants. Penny stocks typically have low daily volume, wide bid-ask spreads, and difficulty finding buyers/sellers. Statement 3 is TRUE: The combination of low trading volumes, limited analyst coverage, and minimal regulatory oversight makes penny stocks more susceptible to price manipulation schemes like pump-and-dump fraud. Small orders can create outsized price movements. Statement 4 is FALSE: While most penny stocks trade on OTC markets, the definition is based on PRICE (under $5), not trading venue. A stock trading at $4.50 on NASDAQ would still be a penny stock, though this is rare due to exchange delisting rules for stocks trading below minimum price thresholds.