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

Which of the following is true about Penny Stocks?

1. They are usually less volatile than major stocks

2. They are traded primarily on the stock market

3. They can present higher risks due to low liquidity

4. They are exclusively traded in domestic markets

The correct answer is: They can present higher risks due to low liquidity

Penny stocks are often characterized by their low price and market capitalization. One of the significant aspects of penny stocks is their higher risk profile, largely due to low liquidity. Low liquidity means that there are fewer market participants buying and selling these stocks, which can lead to greater price volatility. When a stock is not actively traded, even a small volume of shares being bought or sold can significantly affect its price, increasing the risk for investors. Furthermore, this lack of trading volume can make it more challenging for investors to sell their shares without incurring significant price changes. Given these factors, the statement that penny stocks can present higher risks due to low liquidity accurately reflects the nature of these financial instruments. The other statements do not capture the essence of penny stocks accurately, as they tend to exhibit higher volatility compared to major stocks, are frequently traded on over-the-counter markets rather than just stock exchanges, and are not limited to domestic markets—penny stocks can be traded globally.