General Securities Sales Supervisor (Series10) Practice Exam

What does the term "cheap stock" refer to in margin requirements?

1. Stocks worth less than $10

2. Stocks worth less than $5

3. Stocks with no intrinsic value

4. Stocks that are illiquid

The correct answer is: Stocks worth less than $5

The term "cheap stock" in the context of margin requirements specifically refers to stocks that trade at a price below a certain threshold, which is generally considered to be $5 per share. This classification is important for margin requirements set by the major exchanges and the Financial Industry Regulatory Authority (FINRA). When stocks are deemed "cheap," they are subject to more stringent margin requirements due to their higher risk and lower price point. Stocks priced below this level can face increased volatility and liquidity concerns, thus making them less favorable as margin securities. The thresholds for margin requirements are put into place to protect investors and maintain the integrity of the market. Specifically, lower-priced stocks can exhibit wider price swings and are often more susceptible to market manipulation, resulting in a heightened risk profile for both investors and brokers.