Which of the following statements is true of the comparison between penny stocks and blue-chip stocks?

Penny stocks are securities of very small companies, often trading infrequently on over-the-counter (OTC) markets like the OTC Bulletin Board or Pink Sheets. This low trading volume makes them illiquid, meaning it can be difficult for an investor to sell their shares quickly without substantially impacting the price. Conversely, blue-chip stocks represent large, well-established companies listed on major exchanges like the NYSE or Nasdaq. They are traded in high volumes daily, which provides high liquidity, allowing investors to buy or sell shares easily with minimal price impact.

B. Blue-chip stocks, issued by financially stable companies with a history of earnings, are far more likely to pay dividends than penny stocks, which are typically issued by developing companies that reinvest profits.
C. Penny stocks are known for extreme price volatility and are considered highly speculative. Blue-chip stocks, while subject to market risk, are generally characterized by greater price stability.
D. Blue-chip companies are, by definition, large-cap and well-capitalized market leaders. Issuers of penny stocks are typically small companies with limited financial resources and capitalization.

1. U.S. Securities and Exchange Commission (SEC). (2020, September 9). Investor Bulletin: Penny Stocks. SEC.gov. In the section "Risks of Investing in Penny Stocks," the bulletin states, "You may not be able to sell the stock. There may be no market for the stock... Because of the low liquidity, you may have to lower your price to sell your shares." This directly confirms the illiquidity of penny stocks.

2. Financial Industry Regulatory Authority (FINRA). (2020, November 6). Investor Insight: Blue-Chip Stock. FINRA.org. This document describes blue-chip stocks as being from "large, well-established and financially sound companies" that are "generally traded on major stock exchanges." High trading volume on major exchanges is a primary indicator of high liquidity, contrasting with penny stocks.

3. Securities Exchange Act of 1934, Rule 3a51-1. This rule legally defines a "penny stock," in part, as a security not listed on a national securities exchange. This exclusion from major, liquid exchanges is a key reason for their characteristic illiquidity, which is further addressed by specific penny stock disclosure rules (e.g., Rule 15g-9).