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 1 year ago

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