It’s not uncommon to hear a day trader or an investor proclaim that the stock market is rigged. They usually utter this notion after they’ve lost money, often despite following some well-worn advice about precisely how to play the stock market and win. From a rational perspective, suggesting that the stock market is rigged is no different from saying that the Golden State Warriors are winning because the NBA is rigged. No self-respecting NBA fan would say that because there is simply no evidence to support the claim. By the same token no evidence to prove that the stock market is rigged has ever been put forward. Instead what we have is a stock market that has since its founding, stayed ahead of any serious allegations of impropriety, all the while sticking to the principles of fairness and openness.
Stock Market Is Rigged? – Why Market Efficiency Theory Proves Not So
Some day traders who trade penny stocks will say that the stock market is rigged, and some long-term value investors will say the same thing. But that doesn’t mean the market is actually rigged. Making an assertion is not proof – never have, never will be. But there’s proof in one thing though, and that is the efficient market hypothesis (EMH).
EMH is an investment theory that puts forward a simple, yet powerful idea: it’s impossible to beat the markets. Why? Because, says EMH, stocks always trade at their fair value because market value for any one stock is always based on public available information. All that can therefore influence the future projection of a stock is therefore available, thus making the markets efficient. To be fair, EMH does have its detractors, but the practical implications of the theory always show itself to be true and underpinned by solid reasoning.
One can see this playing out for any stock. Take Apple Inc. (NASDAQ: AAPL) for example, it would impossible for any one investor, no matter how smart or technologically capable, to predict with absolute certainty any future price range for AAPL stock. Any such investor making such a prediction would be no better at actually getting it right than some upstart day trader or investors trading stocks on an iPhone. EMH is the reason such a prediction is actually impossible to make.
Stock Market Is Rigged – Why Traders Can Still Trade Penny Stocks
EMH debunks the stock market is rigged hypothesis, but it by no means says that the market cannot yield high returns as a day trader, or even as an investor for that matter. Dealing with the latter point, it is clear that some investors despite EMH have managed to beat the market over a long stretch. We are talking here about famed investors like Templeton and Buffet. Both proved that with the patience of an ox, one can really over time do better with the stock market. The same is of course true for penny stock day traders – only they don’t have to wait 50 years to see any meaningful return.
The reason penny stocks are good for day traders are that they are highly volatile. This volatility helps day traders to make massive gains in a very short space of time. Penny stocks can move as much as 1,000% in a single session as a result of this level of volatility. Of course underlying all of this volatility is the EMH; that essential truth about publicly available information is always there. No penny stocks day trader can avoid EMH; and by the same token, no day trader can promise to deliver any return that is beyond what is possible under EMH.