Dangers of Day Trading And Penny Stocks

Dangerous endeavors of day trading and penny stocks, when investing becomes gambling, and how to loose your money 70% of the time.

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Dangerous endeavors of day trading and penny stocks, when investing becomes gambling, and how to loose your money 70% of the time.

If you’re on Tik Tok, Instagram and any social media app known to man chances are you’ve seen a video like this:

"Here’s how I made $10k overnight at 17. 10 Months ago, I knew nothing about trading. I was exactly where you are. But after some hustling, learning & being relentless I mastered the markets & became one of the youngest day traders. You’ll be in place before you know it if you follow me & I’ll help you out for free"

In fact, you may have seen these exact sentences.

The list goes on and one with videos claiming that “The stock market is basically free money” and they have stock “calls that will 100% make you rich in 2022”.

These videos are super appealing. And most of these “finance gurus” even advocate for learning and consuming information on your own.

“So what’s the harm of exploring a new concept & taking the initiative to learn yourself?”

3 Fundamental Issues with “Investing” on Social Media

  1. Finance influencers most often promote trading vs. investing
  2. People confuse trading and investing, and believe that there’s a set way to ensure profit
  3. Finance influencers tend to ignore social barriers & hide the amount they started with
  4. Median household income in America is $79k, which is not enough to put 1 child through 4 years of college. Financial literacy is also passed down through families (Rich Dad, Poor Dad) and is rarely taught in schools. Because of these two factors, it’s important to note that the amount, comfort level and educational background you start with drastically affects the outcome of your investments.

The Viral Investing Method & Why It’s Deadly

Day Trading is the practice of selling stocks from minute to hour & rarely holding stocks overnight, hence “day” trading. Day Trading is typically a full time commitment that hopes to maximize gains by getting more time in the market through technical analysis.

Influencers fail to mention that technical analysis software (those pretty cool looking charts with arrows, lines and complex dashboards) are expensive and that the legal minimum to start day trading is $25,000.

Most day traders will also outfit their homes for top tier wifi since trades can happen a minute at a time making any server lag costly.

A lot of day traders work full-time at firms or more often, wealthy clients.

But if the top 0.0001% is 10x-ing their money with day traders, isn’t it only fair that I should do the same? Shouldn’t I try to beat them at their own game?

The conversation around day trading would be different if it was a way you could tangibly 10x your money. Realistically, day traders experience quarterly losses 70% of the time (Business Insider, 2021)! That means, on average, day traders only experience quarterly gains 30% of the time!

So why would professionals & wealthy people engage in trading practices that are mathematically likely to result in losses!?

For Full Time Day Traders Traders:

30% kickstarts the gambling attractor in your brain. Traders receive 1 high, or successful trade, and spend the rest of their time chasing it.

Except 30% of the time you get that high, and 70% of the time you fail, and the losses are much greater than the wins. You might be reading this with the assumption you’d have more control, but:

  1. If you’re willing to scroll through Tik Tok for pure 15-60 second dopamine intervals for an average of 52 minutes, you’re likely susceptible to 30% chance.

For Wealthy People Who Employ Personal Day Traders:

Although Day Traders do not provide reliable profits, they provide reliable Wash Sales, a common and legal tax avoidance method.

If you experience realized (from selling a stock) losses from investments, you can declare a Capital Loss. Declaring Capital Loss can lead to a tax deduction proportionate or similar to your losses.

Capital Losses are most often used by major companies and corporations (unfortunately with histories and practices of labor abuse) to maintain absolute wealth.

Similar to many systems, the use of capital losses is not inherently immoral but currently creates intentional imbalance between those who are unaware of these methods (due to lack of inherent resources or district-based education) especially including teens and low income investors and those who have legal protection and financial advisors to work through every gap.

What about Penny stocks?

Say hello to Penny stocks, a Day Trader’s best friend along with Options (which we’ll talk about further into this article).

Penny Stocks are stocks that trade under $1. Despite the affordable appearance, Penny stocks suffer from drastic spikes and drops from minute to an hour.

Manipulating reputable stocks from known companies is difficult because there are many investors (so any actions are diluted, or have lesser impact) and extreme manipulation (if pulled off) would lead to drastic affects across the market.

So instead, Day Traders turn to Penny Stocks. The fluctuations in a penny stock’s price do not come from investors predicting that company’s success but rather Day Traders exploiting market swings and prices.

It is common for penny stocks to shoot up by ++% in one hour and drop - -% the next, making them a dangerous place to store money in, especially for young investors.

What about Stock Options?

Day Trading includes the usage of Options, which have led to heart breaking suicides in recent years from lack of knowledge and vulnerability in the markets.

Stock Options gives the buyer the right/option to buy or sell a stock with a preset date.

Because of the pure power & control the seller of options hold, one can imagine the abuse on young investors in addition to other significant risks.

Key Takeaways

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Allan for Bloom


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