Securities Trader Representative (Series 57) Practice Exam

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For a penny stock transaction, which of the following must be provided to the customer?

Risk disclosure document on penny stocks
The current quotation for the security
The compensation the broker-dealer will receive for the transaction
The compensation the registered representative will receive for the transaction

The correct answer is: Risk disclosure document on penny stocks

In the context of penny stock transactions, it is essential to provide a risk disclosure document to the customer due to the inherent volatility and lower liquidity associated with penny stocks. This document serves to inform the investor about the specific risks involved in trading these types of securities, which may not be immediately apparent. The risks associated with penny stocks can include extreme price fluctuations, low visibility in the marketplace, and susceptibility to manipulation. Providing this documentation ensures that investors are aware of the potential for substantial losses and enables them to make more informed decisions. The requirement for a risk disclosure document is part of the regulatory framework established by the SEC and FINRA to protect investors and promote transparency in transactions involving these higher-risk securities. This obligation is particularly significant given that many individuals may be drawn to penny stocks due to their low price and the potential for high returns, without fully understanding the associated risks.