Can Mutual Funds Own Stocks Under $5?

An institutional bias against penny stocks isn't as real as commonly believed.

It's often said that mutual funds and other institutional investors can't own stocks that trade for less than $5, condemning low-priced stocks to retail ownership only. But the truth is actually the opposite -- there are some roadblocks for investing in penny stocks, but they are most applicable to average Joes, not professional investors who run institutional sums.

Why share prices matter (and why they don't)
Mathematically, a company worth $10 billion is still worth $10 billion, whether it is sliced into $1 shares or $1,000 shares. However, the government takes a different view due to laws passed to thwart bad brokerage practices.

Congress put share prices in the spotlight when it made it more difficult for brokers to process client transactions in stocks priced lower than $5 each, the cutoff point below which a stock earns the "penny stock" label.

These regulations were put into place following a broad crackdown on sketchy stock brokers in the early 1990s. Back then, brokerages sold penny stocks of questionable quality to investors all around the country by phone, charging huge commissions on each trade.

These folks weren't bad at picking good stocks, but rather good at selling bad stocks. One of the largest busted brokerages was J.T. Moran, which was the basis for the story in the movie Boiler Room. Stratton Oakmont, featured in Wolf of Wall Street, fits the description, too. You get the idea here.

https://www.fool.com/investing/2017/11/06/can...der-5.aspx