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!

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:

– 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.

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 and the New York Stock Exchange.


Roberit Pérez says:

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Bob persyst says:

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.

Financially Aware says:

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

Anthony Conley says:

WNTR stock is it a sham?

Storm-Traders says:

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👍🏼

Rhonda Britt says:

U added this after most brokerages went no commission, so hard to believe anything u say after that

Own The Chaos says:

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.

Justin Snowden says:

When will the sec start holding people accountable for running these fake pump and dump schemes on youtube

mcspankyotool says:

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. 👍😁👍

John Wick says:

what a joker, get the facts correct before posting you moron, motley fool loses more credibility.

Emotional Trader YT says:

Day Trading very Hard, but worth it if you come out on TOP.

Adam Cornett says:

Not an honest sales pitch. "Penny Stocks are the devil." Makes them sound desperate.

Sam Sabrosa says:

Pls do a video on brokers execution vs commission paid. Which gives more savings?

piby 180 says:

keep btfd and hold. Simple.Profitable. Yalleh Yalleh

Human says:

Motley Fool sales team. Shame on you.

Human says:

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.

Human says:

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.

LenNay says:

Brokerage fees are being eliminated to $.00, that is a dated argument if you use Schwab, ETrade, TDAmeritrade etc

freakk21 says:


Mlogan11 says:

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.

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