In this article, we discuss the 10 best books on penny stocks. To skip the detailed analysis of penny stocks and their pros and cons, go directly to the 5 Best Books on Penny Stocks.
Stocks that trade for less than a dollar, or sometimes less than five dollars, are often seen as a high-risk, high-reward investment opportunity. These stocks are typically not offered by full-service brokerages due to their inherent risks. Many penny stocks belong to companies facing bankruptcy, new businesses with little market presence, or firms burdened with heavy debt. A lot of them are traded over the counter. However, some of them are traded on well-known exchanges such as NYSE or NASDAQ. Penny stocks are usually considered high-risk, high-reward stocks due to their high volatility and low liquidity.
Are Penny Stocks Safe?
Although there is nothing inherently wrong with penny stocks, they are prone to be used for scams as most of these companies are new and don’t have much information available.
One of the most common penny stock scams include pump-and-dump schemes. A pump-and-dump scheme involves scammers boosting the price of a stock or security by tricking gullible individuals into buying through misleading and exaggerated statements. People involved in such scams have significant shares in the stock and dump them as soon as the stock price goes up. Many people might be familiar with pump-and-dump schemes from the movie “Wolf of Wall Street.” It is based on the life of Jordan Belfort who ran a pump-and-dump scheme through his firm, Stratton Oakmont, in the early 1990s.
Pump-and-dump scams are sometimes paired with share dilution schemes where the company would issue additional shares for no apparent reason, which would decrease the stock price of a company significantly. This can open up several avenues for the scammers. They can either boost the stock price and sell the shares like a traditional pump-and-dump scam or opt for a reverse stock split once the share float increases to an unsustainable level.
Chop stocks are another commonly known penny stock scam where a broker purchases a stock from a promoter for pennies and sells it for several dollars to unsuspecting investors. To avoid being tricked into investing in shady penny stocks, people need to do their homework.
Distinguishing between promotional material and genuine research is crucial, as many promoters hire writers to produce enticing reports. Stocks with more transparency and comprehensive reporting are generally less risky, while those labeled with a “Caveat Emptor” sign by OTC Markets Group should be approached with caution.
Reverse mergers are a way for private companies to go public without much hassle. However, they can also be used by private companies to falsify a company’s financial records to jack up the price. In 2011, several Chinese companies were accused of running reverse merger scams.
Performance Over the Years
Not all penny stocks are scams. Some of the most successful companies in the world, such as Amazon.com, Inc. (NASDAQ:AMZN), NVIDIA Corporation (NASDAQ:NVDA), and Tesla, Inc. (NASDAQ:TSLA), started out as penny stocks. Amazon.com, Inc. (NASDAQ:AMZN) had an IPO price of merely 75 cents, and by September 26,2023, it had gained around 142,490%. NVIDIA Corporation (NASDAQ:NVDA) IPO’d at $12 and came out to 82 cents after adjusting for stock splits. Today, it is a trillion-dollar company, and its share price has increased by over 51,000%. Tesla, Inc. (NASDAQ:TSLA) was trading for $1.28 on July 2, 2010, and its stock price increased slowly for nearly a decade. By July 2019, it was trading for somewhere around $15.5. The company grew over the past few years amidst the rising electric vehicle trend.
It’s an established fact that penny stocks are high-risk, high-reward stocks. According to a research, the best time to invest in penny stocks is the first 11 months of IPO. Generally, these stocks return around 18% to 20% in the first year of issue and then experience a sharp decline after the 13-month mark. Nevertheless, penny stocks have shown some remarkable returns during some specific periods. Between 1992 and 2015, the Dow Jones U.S. Micro Cap returned nearly 1200% compared to nearly 700% for the S&P 500 Index. Moreover, the Russell 2000 Index, which covers the smallest 2,000 stocks in the Russell 3000 Index, hasn’t performed badly over the years compared to the S&P 500. Between the end of April 2004 and May 2023, the Russel 2000 Index returned around 210%, while the S&P 500 Index returned over 250%. It is important to note that the Russell 2000 Index also includes over 400 mid to large-cap stocks as of September 10.
In his book “Stocks for the Long Run,” the economist Jeremy Siegel quoted a study conducted in 1981 by Rolf Banz, a graduate student at the University of Chicago. Siegel mentions that even though according to the study, small-cap stocks “systematically outperformed large stocks, even after adjusting for risk as defined within the framework of the capital asset pricing model,” small-cap stocks have shown a mixed bag of good and bad times in the past 84 years.
Since the COVID-19 pandemic, the global economy has been suffering quite significantly. During these rough macroeconomic conditions, the rising inflation and interest rates have forced investors to opt for well-established and safe stocks. However, it has also created several opportunities in small and micro-cap stocks, as explained by Perritt Capital Management in the following words:
“Because institutional investors tend to shy away from micro-cap stocks, it is not surprising to find that very few analysts keep tabs on their activities. In the early 1980s, Professors Avner Arbel and Paul Strebel authored a study entitled “The Neglected and Small Firm Effects.” In this study, the authors tested the notion that the stocks of less researched companies provide greater risk-adjusted returns than more researched companies. Their study of S&P 500 Index companies indicated the less the research concentration, the greater were risk-adjusted returns. When research concentration was coupled with firm size, the favorable risk-adjusted returns were magnified. While small firms outperformed large firms during the study period, under-researched small company stocks performed even better. In other words, the absence of analyst attention distorts the risk/return characteristics of small firm stocks.”
New investors can avoid regular mistakes and find promising penny stocks by learning from experienced investors. At Insider Monkey, we keep a regular check on stocks with a high potential upside. For some of our suggestions, you can take a look at 10 Best Value Penny Stocks To Buy and 16 Most Undervalued Penny Stocks To Invest In.
Image: Depositphotos
Our Methodology
For this article, we created this list of best books on penny stocks according to public consensus from websites like Reddit and Quora. Due to low amount of recommendations on the two websites, we also took recommendations from several other websites including Youthful Investor and Penny Stock Whizzkid.
Best Books on Penny Stocks
10. Penny Stocks: Fundamental Skills To Dominate Penny Stocks: Jordan Sykes
This book explains the fundamentals of penny stocks. It teaches how to go from a penny stock novice to a penny stock pro. Furthermore, you will also learn how to create your own trading techniques and how to avoid scams in penny stocks.
9. Technical Analysis of the Financial Markets: John J. Murphy
John J. Murphy is the director of Merrill Lynch’s Technical Analysis Futures Division and his book Technical Analysis of the Financial Markets the concepts of technical analysis and their application in the futures and stock market. The book is not only beneficial to all types of investors including penny stocks.
8. Invest in Penny Stocks: A Guide to Profitable Trading: Peter Leeds
Peter Leeds is a small stock expert who has written several books on penny stocks. This book will teach you how to find penny stocks with high growth potential that others have ignored or missed. In this book, he also reveals his signature 29-point Leeds Analysis. Peter Leeds has written several other books on penny stocks which investors should consider.
7. How to Trade in Stocks: Jesse Livermore
Jesse Livermore is considered one of the best day traders of all-time. He is also one of the most famous American investors and was able to accumulate nearly 1000% gains between the ages of 18-20. Jesse Livermore was the “Boy Wonder of Wall Street” and his book, How to Trade in Stocks, can help penny stock investors and safe stock investors equally.
6. The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks: Ian Wyatt
Ian Wyatt is the person who started SmallCapInvestor.com. In this book, he explains how to invest in smaller companies worth less than $2 billion. These companies have higher potential returns than large or mega cap companies. Wyatt explains his successful way of investing in eight simple steps, showing how to find, study, and understand small-cap stocks that could make investments grow. He carefully goes through the important things to consider when choosing stocks and deciding when to buy or sell them, explaining each step as you read along.
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Disclosure. None. 10 Best Books on Penny Stocks is originally published on Insider Monkey.