Everyone Fails With Penny Stocks & Day Trading — Here’s Why

Dylan Lewis: We get questions all the time
on YouTube about one topic in particular. In this FAQ video, we’re going to break it
down. I’m Motley Fool editor Dylan Lewis, and today, we’re going to be talking about how
people trade penny stocks and why they shouldn’t. We get this question a lot because there’s no shortage of people online talking up day trading.
A quick search on YouTube, and you’ll find an endless stream of videos with some
guy smiling in front of a computer and a bunch of charts on the screen, and he’ll promise
you he can teach you how to make thousands of dollars from anywhere in the world.
It sounds amazing, but it’s largely bunk. The problem with day trading penny stocks is that it
combines two of the most destructive investing pitfalls: one, trying to time the market,
and two, buying stocks instead of businesses. A lot of our videos talk about the difficulty
of trying to time the market — that is, to read technical indicators to try and buy stocks
at the absolute bottom and sell them at the absolute top. Day trading takes market timing
and puts it on steroids, because all your buy and sell decisions are made daily or hourly
based on stock price movements. On top of the issues that come with timing the market,
day traders are often paying fees on every single transaction. Even if trades are profitable,
they come with $5 to $7 brokerage commissions. Oh, and because day trading tends to dominate
time in hours, days, and weeks, most the gains investors earn are taxed at the short-term
capital gains rate, aka your standard income rate, which is between 10% and 37% for most
people, instead of the more favorable tax rate investors get for holding
an investment long-term, 0%, 15%, or 20%. But you would be lucky to even have profits
to tax with penny stock day trading. In the mid-2000s, a group of academics studied the
activity of day traders on the Taiwan Stock Exchange. They found heavy day traders earned
gross profits, but their profits are not sufficient to cover transaction costs. Moreover,
in a typical six-month period, more than eight out of 10 day traders lose money. The researchers
closed with saying, “Prospective day traders should be apprised of their likelihood of
success: only two out of 10 make money, and fewer do so consistently.”
Market timing is hard, which is why so few people are able to do it and make money consistently.
Add to that the seedy elements of penny stocks, and it becomes even harder to make money.
The world of penny stocks is rife with speculation and hearsay, and these stocks tend to move
more on buzz than on core business fundamentals. That’s because penny stocks are generally smaller,
less established companies that have market caps, or total business value, of less
than $100 million, and shares priced below $5. They often trade OTC, or over the counter,
meaning they aren’t traded on major exchanges like the New York Stock Exchange or the NASDAQ.
This means that the companies don’t have to go through the more rigorous reporting requirements
established by these major exchanges, and that shares are less liquid. Liquidity is
kind of a squishy concept, but basically, a less liquid stock will move more dramatically
when any one person tries to buy or sell it. Now, penny stocks often catch the eye of new
investors because the shares don’t cost a lot of money and because the low share price
makes big returns so easy to imagine. It doesn’t seem too far-fetched for a stock currently
trading at $0.10 to be worth $0.30. And with only $100, you could buy 1,000 shares.
The reality is, those shares are probably priced at $0.10 for a reason. Most penny stocks are
unproven businesses with limited operating history, and many of them don’t have tangible
products or profits to show investors. They trade over the counter because they
operate on the margins of our financial markets, which makes them a rich area for fraud
and manipulation. In a best case penny stock scenario, you might be trying to buy an unproven company that
hasn’t been vetted by analysts and exchanges. In a worst case scenario. You could be a sucker
for pump-and-dumps schemes. Penny stock promoters will talk up little-known companies worth
only a couple of million dollars and blast online forums explaining the business is working
on game-changing technology that can make the company worth 100X what it currently is.
Before they do this, they’ll buy shares, then enjoy the ride up as new investors bid up
the stock price. Then, the fraudsters will cash out and make money. Their followers will
be left holding shares of a company they don’t know anything about, and with the fake hype
gone, the shares will drop back down to their previous lows. Penny stocks
and day trading are one of those situations where two negatives don’t multiply
to make a positive for investors; they add to create an even bigger loss. Instead of
market timing and buying up obscure companies, investors are far better off buying mutual
funds or companies that have gone through the vetting and disclosure process of listing
on a major exchange like the NASDAQ or the New York Stock Exchange. Start out with
businesses whose products you interact with every day and understand on some level. Maybe there’s
a software you use for work, or a social media platform you always seem to be checking, or
an e-commerce company that seems to be your go-to shopping destination. The businesses
you know best are a great place to start your own investing research. 
If you want a hand with your homework, we have an investing starter kit. It goes through
all the things to look at before buying a stock, and it also takes you through the money
checklist to make sure you’re actually ready to start investing. You can
get that over at fool.com/start. That does it for this FAQ video! If you have
a topic you’d like to see us talk about, drop it down in the comments section below.
Please give us a thumbs up and be sure to subscribe. I know it seems ridiculous, but these are
the little things that help us reach more people, which lets us make
more content like this.

37 Replies to “Everyone Fails With Penny Stocks & Day Trading — Here’s Why”

  1. First. I avoid both like the plague. Shout out to Shannon Jones. She is hot as fish grease. I love to see a beautiful woman give out great information.

  2. 🤣This comment is for ones you are starting stock investing,For trading,Now is the right time !!Robinhood is how I got started a few months ago. It’s a free platform to trade stocks.https://invite.robinhood.com/satvikv8 is a link. You get a free stock if you do it through the link. I do too! 😄But of course, do your own research, but I love it. Good luck. Or M1Finance is great for Long term investment !! Here's the link for kick start of 20$ or 10$ https://mbsy.co/wpnR7 for m1 finance. Good luck !

  3. Everything is an advertising funnel to sell you more stuff with these guys. I even paid for a two year stock Advisor subscription (mistake.) The notifications and ads still keep coming from these guys since they have my email address.

  4. I really love the Motley Fool but it's disappointing to see that you would release such an "outdated"/irrelevant video. Commissions just went to zero at almost all brokerage firms, therefore the quoted study is irrelevant. Yes, Penny stock trading is a losing strategy for the average investor but this video needs to be updated with more current info.

  5. I am not quite sure why you lump all forms of day trading, penny stocks, and so many other things into one short video. Most of this information is outdated and, while much of it is advice that I might give to beginner traders, experienced traders learn how to deal with or avoid almost every pitfall you mentioned within the first couple of years typically. .Yes,, many penny stock chat room traders refuse to educate themselves and they are never seen in the market after they blow their account once or twice. The timing of this video is particularly weird since many platforms just enacted no fee trading. Of course the banks will get their money in other ways, they always do. I personally know more than 30 people who trade successfully for a living employing several different types of day/swing trading,. Quite a few have found success in the OTC market (which is a different animal and requires other specific skills), while others trade largely low float penny stocks, and others who day trade big board stocks exclusively. Who cares why the stocks run if you are not holding them a long time? Make money and get out. I am 100% with you, though, on the sheer number of scammer "gurus" selling chart patterns, chat rooms, and the like to noobs, Question: why does no one from a big bank or investment company interview legit day traders when/before they post vids like this? I understand you are trying to sell a product, but it comes across as ill-informed. and ill-timed. Just my 2 cents. Still a Fool fan.

  6. I made a ton of money trading penny stocks.. when I was in high school and our Econ teacher gave us fake money to simulate being in the market, lol. Needless to say he got pissed that I didn’t listen to his (good) advice. Fortunately when I got serious about investing real $ I came to the realization that consistently investing in quality companies (with dividends) over the long term leads to wealth. Thx for the vid :).

  7. This viewpoint is no longer as valid as it once was. With access to tools and information, a good trader can use volatility to their advantage. Of course, day trading can be done with every company, not just penny stocks. This information is rumormill churn which instills fear in people that do not understand economics or financial markets and psychology. Trading a $500 stock for small percent gains on volatility is easy if you focus on the right things and limit the garbage you spend time reading/hearing. Disciplined traders set goals, rarely question the targets other than recursive visit to evaluate the thesis. In this way, trades become precision instruments that if planned out well, and acted on timely, create wealth a few hundred dollars at a time.

    If you cast a net of 100k over 20 stocks. You will ride the wall street elevator. Essentially the market goes up over time (as a whole) but there are losers and winners. After 10 years if you doubled your money with a throw and don't watch mentality…you'll be lucky. If you take that same 100k. Make tardes on only targeted predictable volatility, you could trade in and out on 2 and 3% moves within an hour or two. Done for the day. A couple thousand a day is pretty good, safe when it is converted to cash. Usable. Liquid resource that can earn more… Not ride the elevator up and down and up and down untill they add a new floor (increased market value).

    It takes work. It takes guts. It takes solid discipline. If you have that, there is no reason you cannot become wealthy faster than the elevator crowd.

  8. Topic suggestion #MotleyFool based on comments below…free order execution, true, but remaining fees (NASD NY exchange fee, large lot fees (eg over 10k shares per transaction), the “vig” or “spread, taxes, etc) should be discussed in a timely topic video. Thank you.

  9. Your title is wrong as shown by your own video. Some people succeed in penny stocks and/or day trading as actually mentioned in your vid, but they are in the small minority. Why not just post an honest title like MOST will fail or the vast majority will fail? When you give a wrong absolute statement, you look less credible.


  11. LOL. You are a typical foolish Fool who does not know how the trading game is played. Get educated you idiot. So much false info. Ya, pay a mutual fund pay the Motley Fool. Lol. I think not. Suckers beware of misinformation like this.

  12. Research shows 90% of mutual fund investors lose money. 90% of real estate investors lose money. 90% of golfers never become pros so they fail. Same hockey players, race car drivers, … So watch out for scammers like this presenter.

  13. Sorry but a guy that has zero experience day trading telling the masses not too…. lmao. Ya 90% fail because they quit.. the ones that do it for a living got there butt kicked for over a year straight and kept coming back for more. Kept getting up like rocky lol. Thats how you become a winner, never give up, never stop learning. 👍😁👍

  14. LMAO I know all of these traders that you tried to blur out, and they're all successful day traders of penny stocks. Connor and Charlie especially. Most of the channels you pointed out always note the risk involved trading these types of stocks. I was able to quit my job doing it and never looked back, so it can be done. However, it's not for everyone, and most of us aren't like Super Car R telling everyone how he bought his Lambo by day trading, even though we all know that's not true either.

  15. You don’t invest in them.. you trade the hype and get out. Or short the most obvious offerings. They all crash we know that. Just because you know that you have an huge advantage. You short the pump and bank👍🏼

  16. Here is how penny stock scams work and why you should never buy penny stocks period. https://youtu.be/aynMYnTQKF0

  17. This video is old. Zero commission now. The study in Taiwan was done in 1995-1999. Computer technology has advance since then. All you need to understand when trading stocks are the indicators (SMA, EMA, RSI, MACD) and setting up OCO orders. The Taiwan study is out dated. I wouldn't touch penny stocks. UGAZ, RXN, AMD, are good stocks to trade.

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