Hands-on investors flock to Internet

The Internet has changed just about everything in American life, including the way you invest your money.

Outfits such as Ameritrade, E-Trade, Charles Schwab and National Discount Brokers have sprung up like mushrooms after a spring rain in the last few years, catering to people who want to directly access their accounts and perform their own trades.

That’s OK – if you know what you’re doing. For those who have never tried an online broker before, the process generally works like this: You call a broker via an (800) number and get a password for an online trading disk. Then you deposit an amount of money. In return, you’ll get quote services, charts and access to other financial information. Voila! You’re in charge of your investment destiny. All you pay when you make transactions is somewhere between $10 and $20 a trade.

“Some guys like to change the oil in their cars,´ said Clayton Hartman, senior vice president for investments with the Fort Collins office of Salomon Smith Barney. “I think this is a great venue for them. They get it at a good price.”

Not only is it cheap to trade via an online broker, but you also have full control over your own account. Another advantage is that the system is speedy. About one in four trades done now are online, although most of them are small, Hartman noted.

Every e-trader has a good story to tell, said Charles Gogela, chairman of Central Discount Stockbrokers, a 14-year-old independent firm in Fort Collins. “What’s been going on is people telling other people, ‘I made so much on such-and-such a company’ and they start thinking they should get in on this, too.”

Gogela loves the idea of online brokerages for people who know how the market works, what risk is involved and what to expect. He also loves the liquidity day traders – the antithesis of the buy-and-hold investor – bring to the market as they cause wide price swings. “For an experienced individual, I like the idea of the Internet,” Gogela said. “For these guys, it’s an inexpensive way for them to have control over their accounts.”

However, online brokerages have their own problems.

If you take a peek at the Web, you won’t have to go very far before you find sites or pages devoted to slamming certain online services in language that cannot be reproduced here – “certain” meaning that each service has earned its own set of lusty detractors. This is not unusual. The Web is a breeding ground for cranks of all types. However, the customer complaints found on these sites usually fall in three categories: downtime, delays and awful customer service.

“They don’t work like a full-service broker does,” Hartman said. “If the system is down for a couple of hours and you can’t access your account, they have no responsibility.”

Another problem is the delay effect. Markets can turn on less than a thin dime now, and the technology, Hartman said, can’t always keep up.

“The price on the screen may not reflect what it really is,” Hartman said. When a day trader gets his statement, he may be surprised that instead of making ‘X’, he actually lost “Y.”

Hartman quoted some remarks made by U.S. Securities & Exchange Commission chairman Arthur Levitt that complaints about online services increased 330 percent from 1997 to 1998. A story in the Feb. 8 edition of TheStreet.Com said that the New York attorney general has launched an inquiry into customers’ complaints about online brokers.

Gogela thinks online services tend to attract gamblers more than investors; or if they don’t attract them, they breed them. “These guys want their money now,” Gogela said. “That’s why they’re day trading. They aren’t buying to hang on to it. Yet, I’ve never seen people who’ve traded stocks who’ve outperformed the buy-and-hold investor.”

These types can be unusually reckless. Some use their credit cards, student loans or second mortgages as leverage and buy-on margin. Some play with their retirement funds by trading within their individual retirement accounts. Some don’t even know the first thing about many of the stocks they buy. The taste for high-tech companies among day traders is so pronounced that “some buy stocks in what sounds like technology firms,” Hartman said.

Still, a lot of day traders have done fairly well. There really are people who have made a lot of money from one day to the next, just by tapping keys on their computers and investing in Internet stocks. Hartman said there is an old saying in the market: “Don’t confuse a bull market with brains.”

“These Internet stocks have been going up and up like this,´ said Gogela, making a motion with his hands at about the angle of the Leaning Tower of Pisa. “It’s easy to guess right.”

Hartman said there is a lot of financial information out there for online investors to use. The problem is that a lot of it isn’t all that great. “There’s tons of information out there; the trouble is it has to be backed up,” Hartman pointed out. “My opinion is that day traders exacerbate the movements of tech stocks simply because they get lots of rumors from investment chat rooms, and they take these rumors and run with them.”

Nancy Condon, spokeswoman for the National Association of Securities Dealers in Washington, D.C., noted that there are a few things online investors should know before they start clicking their mice.

“You have to know things like what happens if you can’t access your account?” Condon said. “You have to understand how markets can move and move so fast that by the time you execute your trade, it may be significantly off what you wanted. And you have to be aware that although we require members to have balanced and nonexaggerated advertising, it doesn’t mean there aren’t some unscrupulous people out there. If it sounds too good to be true, it probably is. Ask a lot of questions.”

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