A penny stock is defined as any stock that traded for less than $5 per share....

A penny stock is defined as any stock that traded for less than $5 per share. Penny stocks are usually small, and trade infrequently. Some penny stocks trade in the exchange. Compare a penny stock with a stock which is currently included in S&P 500 index, which one would have a wider bid-ask spread? Please explain.

Expert Solution

Comparing a Penny stock and a stock which is currently included in S&P 500, a penny stock will be having a wider bid-ask spread. It can be attributed to the reasons mentioned below.

The volume of the shares traded for S&P 500 stocks will be much larger than penny stock, hence more people will be willing to buy at a specified price range which narrows the bid ask spread.
Volume increases the liquidity of the stock which means the stock can be bought or sold with ease and close to the similar price. Compared to this, penny stocks are highly illiquid.
S&P 500 stocks are perceived as less risk stocks by the public since it has huge market cap compared to penny stocks. Due to this there will be always buyers and sellers in the market which reduces the spread. Whereas Penny stock is considered high risk, as the company is not established yet and there may be chance of bankruptcy of the company.

jeff jeffy answered 2 years ago

Assume that the common stock of Luther Industries is currently traded for 47 per share. The...

Assume that the common stock of Luther Industries is currently traded for 47 per share. The stock pays no dividends. A 3-month European call option on Luther with a strike price of £45 is currently traded for £7.45. The risk-free rate interest rate is 2% per year. Assume that you own common stock of Luther Industries, but you are concerned about a decline in its stock price in the near future. a) Should you simply sell your holding? Why or...

A stock is traded at $50 a share, and there will be no dividend on the...

A stock is traded at $50 a share, and there will be no dividend on the stock in 6 months. The 6-month European calls and puts on the stock with same strike price of $45 are traded at $8 and $2, respectively. The six-month risk-free rate is 5% with continuous compounding. Is there an arbitrage opportunity? If yes, construct an arbitrage portfolio and clearly explain how arbitrage profits are created. If no, why?

DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares...

DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares outstanding. It also expects to have total net earnings of $400,000,000. DB has $200 million in surplus cash that it wants to pay to shareholders. One option is to pay a special dividend. The other option is to repurchase stock with the cash. Evaluate the two alternatives below (ignoring any information effects): a. What is the price of the company’s stock if it announces...

What does it mean when a company's book value per share is less than the market...

What does it mean when a company's book value per share is less than the market value per share of a common stock? Should this be a key concern for an investor?

Stock splits result in: A higher cost per share for all shares than before the stock...

Stock splits result in: A higher cost per share for all shares than before the stock split. A lower cost per share for all shares than before the stock split. An increase in the total cost of the old and new stock combined. A decrease in the total cost of the old and new stock combined. None of the above statements are correct.

5. What is the relationship (if any) between the condition of the penny and its mass?...

5. What is the relationship (if any) between the condition of the penny and its mass? Explain. 6. Comment on how (if at all) the observed condition of the penny affects the calculated density.

The current stock price for a company is $48 per share, and there are 5 million...

The current stock price for a company is $48 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.2, and the expected market risk premium is 6.4%. This firm also has 120,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.1%. If the corporate tax...

5. Apple Stock: The volume of a stock is the number of shares traded in the...

5. Apple Stock: The volume of a stock is the number of shares traded in the stock in a day. The mean volume of Apple stock in 2017 was 35.14 million shares. A stock analyst believes that the volume of Apple stock has increased since then. He randomly selects 40 trading days and determines the sample mean volume to be 41.06 million shares with sample std. deviation of 15.07 million shares. Test the stock analyst’s claim at the a =...

You have been watching a stock which is currently trading at RM50 per share. You would like to buy the stock if it were a little less expensive, at RM47 per share.

You have been watching a stock which is currently trading at RM50 per share. You would like to buy the stock if it were a little less expensive, at RM47 per share. You believe that the stock price will go to RM70 by year-end, and then level off or decline. You decide to place a limit order to buy 100 shares of the stock at RM47, and a limit order to sell it at RM70. It turns out that you...

Question 5 The stock of Elf Corporation is currently selling for $10 per share. Earnings per...

Question 5 The stock of Elf Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its value, what rate...

Question