Investing

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

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The topic: How do I trade penny stocks?

We get this question a lot because there is no shortage of people online talking up day trading. A quick search on YouTube and you’ll find and endless stream of videos with some guy smiling in front of a computer with a bunch of charts on the screen and a promise that he can teach you how to make thousands of dollars from anywhere in the world!

The problem with day trading penny stocks is that it combines two of the most destructive investing pitfalls:

– Trying to time the market
– Buying “stocks” instead of businesses

A lot of our videos talk about the difficulties of trying to time that 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 in on steroids because 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. So even if trades are profitable, they come with $5-$7 brokerage commissions.

Oh, and because day trading tends to denominate time in hours, days and weeks, most of 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 percent.

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 earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money.

The researchers closed with saying:

Prospective day traders should be apprised of their likelihood of success: only two out of ten make money; 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 core business fundamentals.

That’s because penny stocks are generally:

Smaller less established companies, have market capitalizations (or total business value) of less than $100 million, and share prices below $5, trade OTC, or “over-the-counter,” meaning that 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 follow the more rigorous reporting requirements established by these major exchanges, AND that shares are less liquid.

Liquidity is a squishy concept, but basically a less liquid stock will move more dramatically when any one person tries to buy or sell it.
Penny stocks often catch the eye of new investors because the shares don’t cost a lot of money, and the low share price makes big returns so easy to imagine. It doesn’t seem far fetched for a stock currently trading at 10 cents to one day be worth 30 cents — and with only $100 you could buy 1000 shares!

The reality is that those shares are probably priced at 10 cents 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 buying an unproven company that hasn’t been vetted by analysts and exchanges.

In the worst case scenario, you could be a sucker for pump-and-dump schemers.

Penny stock promoters will talk up little-known companies worth only a couple of million dollars and blast online forums explaining that the business is working on game-changing technology that could 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 actually know anything about, and with 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.

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46 Comments
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Robert Dunfee

46 Comments

  1. Russki
    July 13, 2021 at 10:21 am

    Brooo u missed the point here. When we buy penny stocks we make sure that they got potential and we ain't day trading we hold till it quadruples or more. Yes day trading isn't a good way to make money we all know that. You say most penny stocks are unproven well that is why we invest in those in the first place. We want them to be proven. Take for example Microsoft going from 0.10 $ in 1986 to 268 $ today per share. I personally put money in those that have something to offer whether is solar panels or oil doesn't matter. As long as they got a product and potential to increase share price I'm okay with that. BTW many penny stocks are actually listed on the NASDAQ so you're not 100 % right.

  2. Firewheel Farm
    July 13, 2021 at 10:21 am

    Who is paying 5-7 dollars a trade. They probably shouldn’t be trading.

  3. Steve Balogh
    July 13, 2021 at 10:21 am

    you cam lose or make money trading ay stocks

  4. mvlsame
    July 13, 2021 at 10:21 am

    I just wonder why virtually every "retail trader" I see are deluded liars living in fantasy. No, they do not make any money as they say. No, they do not know anybody who does as they say. Why? Cause they do not have any proof/track record to show for their claims. If they were shilling(scammers); understandable, but that is not the case with most. So I just wonder why…

  5. Spartacus547
    July 13, 2021 at 10:21 am

    Why would a small company starting out want to ruin their future prospects by allowing Shady salesman to ruin their reputation? Wouldn't They want to build a company that has long-standing future?

  6. nomearod
    July 13, 2021 at 10:21 am

    Trading penny stocks is like buying used sanitary napkins with blood, you hope other dumb fking morons will buy it for a cent more than you stupid byetch paid for it.

  7. nomearod
    July 13, 2021 at 10:21 am

    Never listen to these stupid moronic day traders trading penny stocks. They all lose huge money long-term wise and these byetches won’t tell you how mush they have lost. Penny stocks are just garbage. Only stupid morons raised by pigs buy it.

  8. No Bo
    July 13, 2021 at 10:21 am

    just don't get greedy, pretty universal advice for stock trading

  9. Ryan James
    July 13, 2021 at 10:21 am

    I mean I've only done two penny stock trades and I made a 150% ROI total between them in 3 days. If you do really good DD and look for catalyst opportunity, it is the same as any swing trade. Proper DD is always the answer.

  10. nomearod
    July 13, 2021 at 10:21 am

    Day traders will end with paying significantly high tax on their profit while long-term investors pay barely nothing for holding and compounding the growth over time. Day traders are just short-sighted morons.

  11. Mark Mcgwires Backne
    July 13, 2021 at 10:21 am

    Hey, what were those 5 winners picked from 2019? Share & I will give you mine for 2021.

  12. Joe Mastriano, CPA
    July 13, 2021 at 10:21 am

    YOU ARE SOOOO WRONG
    No commission and I make consistent $ trading penny stocks. Happy to pay taxes on profits. I hold them overnight and also take off same day. Trading requires a lot more than you imagine, says the "killer IRS CPA"

  13. Christoph Labate
    July 13, 2021 at 10:21 am

    Sounds like a lap dogs sales bitch,maybe his corporate donors rather steer money away from Penny,lmao FOH

  14. Firstname Lastname
    July 13, 2021 at 10:21 am

    You don't seem to have much of a grasp what day trading is.

  15. Jason Parrillo
    July 13, 2021 at 10:21 am

    Just want to say you have it all wrong, lol. I trade only penny stocks (90% of the time) and do well. Who cares about a $6 or $12 round trip commission when you'er making $400-$2,000 a trade give or take. Sure we are in a higher tax percentage but we are sending money to our personal account weekly then reinvesting the left over. Yes most traders loose because they don't learn the trade and download an app like robinhood or they jump on a platform and after a few days they are ready to dive in. I'm grateful for all of those people!

  16. El Ben
    July 13, 2021 at 10:21 am

    If you know what you doing and do the research you can make big money without taking big risks. This guy have zero idea.

  17. LMS
    July 13, 2021 at 10:21 am

    LOOK AT ME!

  18. CoachRaymsey
    July 13, 2021 at 10:21 am

    Change the title of the video to: Idiots who invest in penny stocks fail

  19. A J
    July 13, 2021 at 10:21 am

    @1:46 What is a 'heavy day trader'??

  20. A J
    July 13, 2021 at 10:21 am

    I'm not sure why you're conflating day traders who specialize in penny stocks with all day traders. One is a tiny subset of the other.

  21. A J
    July 13, 2021 at 10:21 am

    Day traders do NOT have to buy at the absolute bottom and sell at the absolute top.

    They can buy ANYWHERE along the upwards movement, as long as they sell at a higher price than they bought at.

    And they can also short a stock and short at any point above they buy at.

  22. A J
    July 13, 2021 at 10:21 am

    All brokers went commission free in August of 2019, two full months before this video came out. You should have done better research.

  23. Weiz
    July 13, 2021 at 10:21 am

    Nice video but I will only trust Mr luscious with my investment

  24. Lee Mack
    July 13, 2021 at 10:21 am

    Lol I have a buddy that makes millions over the years day trading penny stocks…you suck

  25. Alex Steins
    July 13, 2021 at 10:21 am

    He suffers from FOMO and is salty lol jk but fact is your statistics are no better than the E-Commerce statistics that say 99 percent of people fail in starting their own business. Anyone can make money off of anything if they put their mind to it and strategies. It's just 99 percent of people aren't discipline and smart enough to figure it out.

  26. Bora Corba
    July 13, 2021 at 10:21 am

    Thanks for the Video! Forgive me for the intrusion, I would love your thoughts. Have you considered – Rozardner Broker Teaching Reality (should be on google have a look)? It is a smashing one of a kind product for turning one thousand into two thousand five hundred dollars in a day minus the normal expense. Ive heard some super things about it and my work buddy got cool results with it.

  27. Drone256
    July 13, 2021 at 10:21 am

    Using your logic no one should ever start a business because it comes with expenses and most people fail at it. Do you seriously think the best strategy is to invest only in what OTHER people are successful with??

  28. Eduardo Catao
    July 13, 2021 at 10:21 am

    there is no way this guy fuckin put the image of zipcharlie when talking about fraud investors. The only fraud here is motley fool that makes you sign up for a fake shitty newsletter lmao

  29. L M
    July 13, 2021 at 10:21 am

    Maybe YALL do foh

  30. Crypto Capital Venture
    July 13, 2021 at 10:21 am

    My portfolio has grown tremendously, i continue to make huge profits with my broker Mr Paul Stanley

  31. D Love
    July 13, 2021 at 10:21 am

    Well this video sure aged poorly LOL. Literally everyone in my crew already broke 6 figure profit by JUNE of this year on ONLY penny stocks. Not a guru, stock genius, or manipulator. Penny stocks changed my life and these points are laughable.. Everry single point in this video is misleading and/or just plain wrong. ESPECIALLY trading fees. Most sites are 0% commission and even if they charged me $50/trade I wouldnt care. When you consistently profit, a $7 fee is microscopic. Yea, do what this guy says, have fun making 1% per year .

  32. Justin Davis
    July 13, 2021 at 10:21 am

    You could say the same thing about most artistic careers though. Just because 1 in 10 succeed, does not mean you shouldnt try. Otherwise there would be no art in the world.
    Best just attempt it with paper trading frist to see if you are capable of it. There is no risk in that

  33. SqueezeMyShorts
    July 13, 2021 at 10:21 am

    3:36 Haha…. no…. In the BEST case scenario, it'll be a pump and dump scheme. Penny stock traders know that penny stock companies are shit. That's the reason we trade them.

  34. Taylor Thompson
    July 13, 2021 at 10:21 am

    You can buy breakouts. Buy high. Sell higher.

  35. TryllaTröllMaistre Fictitious Fables of Europa
    July 13, 2021 at 10:21 am

    Funny even Tesla does that now so you where saying?

  36. Solomon Douglas
    July 13, 2021 at 10:21 am

    The $UPZS gourmet CBD Food products will be available for purchase through various CBDretail outlets nationwide

  37. j b
    July 13, 2021 at 10:21 am

    This is one of the most simplistic, small thinking vids I have ever seen on trading. What a dummy.

  38. Axe God
    July 13, 2021 at 10:21 am

    Penny stocks are like hookers.

  39. W M C
    July 13, 2021 at 10:21 am

    This video is for the person who says, 'Oh my, penny stocks seem affordable.. I think i will buy some as they're so cheap' all along knowing nothing about what's really going on. Mention 'fundamental analysis, doing some due-diligence, looking at some SEC info, researching who these people are' and their eyes will glaze over. 'You don't get it, I just want to buy some stocks that are cheap…. Oh look!' they add, 'This one went up 1000% in one day, I think I will buy some shares now'. Savvy player in this space can earn big money plying against those who bought in on the hype and rise.

  40. W M C
    July 13, 2021 at 10:21 am

    At 4:03 the fool refers to 'fake hype'. Wow! That got me to look up the word 'hype'.
    Nope. I am right, he is wrong.

  41. AWAKE ENLIGHTEN
    July 13, 2021 at 10:21 am

    “The market is a device for transferring money from the impatient to the patient.” ― Warren Buffet

  42. j b
    July 13, 2021 at 10:21 am

    Yeah dude, that's why you have to get up, shower, and commute round trip to work after spending 8 hours earning a paycheck. Because you don't know how to TRADE (not invest) for a living and much easier lifestyle.
    There are many people that trade penny stocks for a living, without having to pump.
    Those who can trade, trade. Those that can't trade write about trading! So why would anyone take you seriously when your just a journalist??

  43. robert gorrell
    July 13, 2021 at 10:21 am

    I'm no expert in trading but have made $5,500 with $500 investment. I had good guidance with Karen Maynard's and her team it is beyond eye opening with these teachings and trading skill, I have nothing but continued success. Feel free to contact her ((<<karenmaynardco @ gmail.com>>))

  44. Financially Aware
    July 13, 2021 at 10:21 am

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

  45. Anthony Conley
    July 13, 2021 at 10:21 am

    WNTR stock is it a sham?

  46. Storm-Traders
    July 13, 2021 at 10:21 am

    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👍🏼