For some reason some people have a very hard time understanding how people make a huge amount of money by buying and trading stocks every day. You’ve probably seen that commercial where they are making fun of day traders by showing the guy buying a painting and then selling it right away. That’s a dumb commercial and this example will show you why.
I will keep this example very simple to make it easy to understand. In this example someone simply buys a stock at the beginning of each trading day and then sell it at the end of the trading day. I won’t get into how they pick the stock or any of that. I just want to show you how the money can ramp up from buying and selling stocks in this way. In my example I will not consider the fees because they should be pretty insignificant in comparison to the earnings.
Let’s say that John starts off with $1000 and has decided to go 20 business days (four weeks) using all of his money to buy one single stock and then sell that stock at the end of the day (I wouldn’t advise this strategy, it’s just to make the example easier to understand.)
Day 1: The stock he buys at the beginning of the day goes up 10% by the end of the day when he sells it. He now has $1100. He now has an extra $100 to invest the next day.
Day 2: The stock he picks on this day doesn’t go up at all, but it also doesn’t go down. He still has $1100. Never every stock pick will be a winner.
Day 3: Up 25%! This is a big winner. His $1100 is now $1375 after a gain of $275.
Day 4: Up 50%! Huge winner. His $1375 is now $2062.
Day 5: Down 10%. Like I said not every stock is a winner. John is now at $1856.
Day 6: Up 20%. He’s now at $2227. Are you starting to see how these winning days start to really “ramp up” over time?
Day 7: Up 5%. Now at $2338.
Day 8: Up 10%. John is now at 2572.
Day 9: Up 300%. Yes, days like this can actually happen if you are working with penny stocks. Of course the key is known which stocks to pick. John is now at $10,228!
Day 10: Down 25%. If you are dealing with risky stocks, some days you may have a big loss. But what you’ll see from this example is that big losses don’t effect things the same way that a big win does. Even after this 25% loss John is still at $7671.
Day 11: No movement. Some days you pick a stock and it doesn’t move up or down significantly. See Day 2!
Day 12: Up 30%. John is now at $9972.
Day 13: Up 100%. Another big day and like I said these really do happen when you are dealing with penny stocks. They are the most volatile stocks on the stock market (both with gains and losses.) John is now at $19,944.
Day 14: Up 50%. John is now up to $29,916! Do you see how quickly the money can grow once the amount you are investing gets bigger?
Day 15: No movement.
Day 16: Up 300%. Another absolutely huge day! And this time John had a lot more invested so he’s all the way up to $119,664!!!
Day 17: Down 10%. John is now at $107,697.
Day 18: Up 3%. John is at $110,927.
Day 19: Up 10%. John is at $122,020.
Day 20: Up 5%. John finished with $128,121.
In just four weeks John grew his $1000 into $128,121 in this example and that’s despite 3 days where there was no movement and 3 days where his stock picks went down!
In comparison let’s imagine that John just bought one stock on Day 1 and kept it the whole month. Now let’s imagine that one stock went up 100% (as unlikely as that may be.) In that case (where he keeps the one stock for the full month) he’s only at $2000! Buying and selling (and buying and selling again and again) got him up to $128,121 but buying and holding (even when the stock went up big time) only got him to $2000.