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The research available on day trading suggests that most active traders lose money. Fees and overtrading are the main contributors to these losses.
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A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 American households that held stocks from 1991 to 1996. The households that traded the most had an average of 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.
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A 2014 paper (revised in 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. Looking at the continuous performance of day traders in this sample, he found that 97% of day traders can expect to lose money from trading, and more than 90% of all daily trading volume can be traced to investors who predictably lose money. In addition, he linked the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.
A 2019 research study (revised in 2020) called “Day Trading for a Living?” observed 19, 646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The authors of the study found that 97% of traders with more than 300 days of active trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded infrequently, and that more frequent trading activity decreased the chance of profitability.
These studies show the wide variance of the data available on the profitability of day trading. One thing that seems clear from the research is that most day traders lose money.
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How To Invest In Penny Stocks
Barber, Brad M. and Odean, Terrance, Trading is Dangerous to Your Wealth: Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Lifetime?”
Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Next: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”
Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101″A penny stock typically refers to the stock of a small company that trades for less than $5 per share. Although some penny stocks trade on major exchanges such as the New York Stock Exchange (NYSE), most trade via over-the-counter (OTC) transactions through the electronic OTC Bulletin Board (OTCBB) or through the Privately owned OTC Markets Group.
In the past, penny stocks were considered any stock that traded for less than a dollar per share. The United States Securities and Exchange Commission (SEC) amended the definition to include all stocks trading under five dollars. The SEC is an independent federal government agency charged with protecting investors by maintaining the proper and orderly functioning of these currency markets.
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Penny stocks are usually associated with small businesses with a lack of liquidity, which means there are few ready buyers in the market. As a result, investors may find it difficult to sell the shares since there may not be enough buyers. Due to low liquidity, investors may have difficulty finding a price that accurately reflects the market.
Due to their lack of liquidity, wide bid-ask spreads or price ratios, and small company sizes, penny stocks are generally considered highly speculative. In other words, investors could lose a considerable amount or all of their investment.
Penny stocks often represent growing companies with limited cash and resources. Since these are primarily small companies, penny stocks are best suited for investors who have a high tolerance for risk.
Typically, penny stocks have a higher level of volatility, resulting in a higher potential for reward and, thus, a higher level of inherent risk. Investors could lose their entire investment on a penny, or more than their investment if they buy on margin, which means that the investor borrowed funds from a bank or broker to buy the shares.
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Investors should consider the high risks associated with penny stocks. For example, an investor should have a predetermined stop-loss order before entering a trade and know what price level to exit if the market moves against them. Stop-loss orders set a price limit that, once reached, will trigger an automatic sale of the securities.
Although penny stocks can have explosive gains, it is essential to have realistic expectations and understand that penny stocks are high-risk investments with low trading volumes.
Because of their low volume, penny stocks tend to be more volatile than established companies. This means great opportunities for gains and losses, and investors should be careful to understand the risks and benefits.
Penny stocks provide some small businesses with a way to access funding from the public. These companies can use this platform as a starting block to move into a larger market.
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Also, since they are selling at such low prices, there is room for significant upside. Some companies, such as Amazon (AMZN) originated as penny stocks, but later grew into sizable blue-chip companies.
A blue chip is a nationally recognized, well established and financially sound company. Blue chips usually sell high quality and widely accepted products and services. Blue-chip companies typically have a history of weathering recessions and operating profitably in the face of adverse economic conditions, which helps contribute to their long record of stable and reliable growth.
However, certain factors exacerbate the risk associated with investing in or trading penny stocks. These securities are generally riskier than more established companies.
When considering options for potential investments, it is important to have enough information to make an informed decision. For a few cents, information on corporate performance can be very difficult to find. When this is the case, the information that is available on them may not come from credible sources.
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Stocks traded on the OTCBB carry the suffix “OB” to their symbol. These companies file financial statements with the SEC. However, companies listed on the pink sheets are not required to file with the SEC. As such, these businesses do not receive the same public scrutiny or regulation as the shares represented on the NYSE, the Nasdaq and other markets.
Stocks on the OTCBB and pink sheets do not need to meet standard minimum requirements to be available for sale through OTC exchanges. When a company can no longer maintain its listing position on one of the major exchanges, the company can move to one of the smaller OTC listing exchanges. Minimum standards may act as a safety cushion for some investors. When a company is not subject to higher standards, investing in that company becomes much more risky.
Many of the companies considered to be penny stocks could be formed again, and some could approach bankruptcy. These companies generally have a poor or no track record. As you can imagine, this lack of historical information makes it difficult to determine the potential of a stock.
Stocks that trade infrequently don’t have much liquidity. As a result, it is possible that investors will not be able to sell the stock once purchased. Investors may need to lower their price until it is considered attractive to another buyer.
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