Common fallacy ...
Every new trader "invents" this idea.
You'll simply get closed out as stocks move down.
I [buy a stock] and each time the stock goes up (even if only 1 moves each month) 2% I sell that stock ...
It's completely commonplace that you buy a stock, and from that day forward it goes only down, whatsoever.
In your example just one of your $500 bets could turn in to, say, $120 or $150, making you lose 300 or 400 bucks.
Or you could "merely" lose $200.
That enormous loss on just one of your "plans", would completely wipe out the pathetic gains of a few dollars you are making from all your other "plans".
I hope it makes sense.
One loss utterly wipes out literally hundreds of other "wins":
To try to explain it another way:
you are simply wildly underestimating how often and much you lose when you try this.
You'll find this question will probably just get closed because every single new trader "invents" this idea. Every. Single. Time.
In the history of the universe, Every Single Person who has thought about "trading! stocks!" has "invented" this idea.
You now know clearly why it doesn't work: you are simply wildly underestimating how often and much you lose when you try this.
These days you can very easily "paper trade" stocks. I urge you to try it.
I will give you 10 thousand real bucks if you can show it worked.
Enjoy paper trading!
BTW there's a similar "everyone invents this..." with gambling. Every new gambler, say roulette player, invents the Martingale "method". (You can google it up.) It too (obviously, or everyone on Earth would be a billionaire) has a Fatal Flaw.
Unrelated question. Stock picking:
Regarding unrelated "Scenario 1" also mentioned in the question...
That's just called "stock picking". (You better be good at picking the 20.)
The more you have in the basket, the safer it is. The less you have in the basket, the more risky it is in both directions. In fact ........... the very best way to invest is nothing more than:
That's the whole story.
There's nothing else to "investing".
If you think you can pick a basket of "20" stocks, where you believe Your Basket will do better than an ordinary S&P index fund: that's just called "stock picking".
You will not be able to do better than an ordinary S&P index fund.
10,000s of stock pickers try this every year ........... and they all spectacularly fail.
How to lose 50 billion in a few months:
Here's a joker who lost fifty billion dollars by picking a basket of 20 or so stocks - literally exactly as in the question.
(Hilariously: afterwards, the guy in question, the only thing he had to say for himself was: "Yeah. It's hard to beat the S&P." OK, no shit Sherlock. Nice call. Good way to lose 50 billion of other people's money.)
Some "beat the S&P" 1 year out of 10 or 20, which is just random.