Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

What characterizes Penny Stocks?

1. High liquidity and low volatility

2. Very low market price and volume

3. Stocks exclusively traded on the major exchanges

4. Only available to institutional investors

The correct answer is: Very low market price and volume

Penny stocks are characterized primarily by their very low market price and typically low trading volume. These stocks usually trade at a price of less than $5 per share, although the definition can vary among different market participants. Such low price points often result from the companies being newer, smaller, or less established. The low volume may indicate limited investor interest, which can lead to higher volatility as even small trades can significantly impact the stock's price. In contrast, other options present scenarios that do not align with the typical characteristics of penny stocks. High liquidity and low volatility, for example, are traits more often associated with larger, more established stocks rather than penny stocks, which can exhibit the opposite due to their limited trading activity. The notion that penny stocks are exclusively traded on major exchanges is also incorrect; they are frequently traded over-the-counter (OTC) rather than on established exchanges. Lastly, suggesting that penny stocks are only available to institutional investors is misleading, as they are more commonly accessible to retail investors looking for high-risk investments. Thus, the defining feature of penny stocks focuses on their low market price and volume, making the choice regarding very low market price and volume the accurate characterization of these investments.