For example, take one of the TV ads for Ameritrade. Two young suburbanites dash back from jogging. One of them sweeps her daughter off the computer (“Mama’s gotta trade!”). Click click, she checks her little biotech stock. “Wow, market’s up!” Click, sell and grin: “I think I just made about $1,700!” Her friend confesses, “I have mutual funds.” Poor thing. How middle-aged.
E*Trade ran a commercial showing a snotty stockbroker shutting his mansion door in your face. A gutsy customer drops the broker and trades for himself. Click, now he owns a mansion, too.
In a Discover Brokerage ad, a young tow-truck driver works strictly for fun. For money, he trades stocks “big time.” A flabbergasted businessman learns that the driver owns a tropical island (“Technically, it’s a country,” the driver smirks).
Technically, it’s Fantasy Island, where the chief promontory is Liar’s Bluff. There, stocks never drop. Traders never lose.
In real life, the more people play the market like a videogame, the more dreams will die when prices turn. “I remember how bad it was after the 1987 crash,” says David Pottruck, president of Charles Schwab Corp. “Some people lost everything. There were many divorces. Retirees had to go back to work.”
No clue: Even now, some traders are losing their savings or running up huge debts with their brokers, not because of bad judgment (or not only bad judgment) but because they haven’t a clue what they’re doing. Here’s the online landscape today:
These accounts go through discount brokers who typically give no investment advice. Pushed by Web competition, about half the firms charge $15 or less for market trades (other options may cost more). The three rated tops for cost, service and usability by the consulting firm Gomez Advisors in Concord, Mass.: Discover and E*Trade ($14.95 minimum commission, plus $5 for limit orders–see below), and DLJdirect ($20 minimum). Schwab ($29.95 for stock) offers more service and gives some advice.
But the less money Mama’s going to make. Terry Odean, a finance professor at the University of California, Davis, tracked the seven-year performance of 10,000 trading accounts at a large discount brokerage firm. On average, he found that the stocks people sold did better than the stocks they replaced them with. In a second study, he found that the more people traded, the poorer their results.
Many a loss comes from making simple trading mistakes. For example:
You enter an order for a hot stock. That’s a “market order,” to buy the stock at any price. If it’s spiraling up, the order you placed at $8 a share might be filled at $40. Suddenly, you’ve overpaid and may be in debt to your broker, too. For stocks like these, use a “limit order,” which specifies the maximum price you’ll pay.
You enter an order, but the confirmation doesn’t appear right away. So you enter again. You’ve just placed a second order and are responsible for both.
You click on “cancel” to stop an ill-considered order. But that won’t stop a trade that has been executed.
You go on vacation while holding speculative stocks. When you get home, their price has dropped for good.
You borrow from your broker to buy Internet and other speculative stocks. When they plunge (I said when, not if), you’ll lose far more money than you originally put up.
You believe in a stock hyped on an online message board. Didn’t your mother warn you not to take candy from strangers?
Formerly, the average stock offered at, say, $12 might have risen to $14 the first trading day. That profit potential helped the stock’s underwriter line up investors–generally, institutions and favored individuals. Supposedly, the buyers believed in the company and would keep the stock. It was rare for an IPO to soar.
Today, the mania for tech and Internet IPOs sends first-day prices over the moon. The original buyers flip their shares within hours to investors who plan to sell to a greater fool at a higher price, and sometimes do. A few months later, the company (and its insiders) offers a second lot of shares–now at that higher price. When the stock fades, only the innocents are still aboard.
Not many individuals get to purchase IPOs at the low, inside price. Eleven online brokers receive small allotments, but a limited number of clients can buy. The San Francisco investment banker W. R. Hambrecht is promoting a scheme for opening IPOs to all comers. But if retail investors get in at the start, who will be left to drive up the price when the stock comes out? Online junkies don’t want a fair price, they want a chance to get rich quick.
The regulators are making pointed references to the guileful ads. Arthur Levitt, chair of the Securities and Exchange Commission, says they “border on irresponsibility.” Mary Schapiro, president of the National Association of Securities Dealers Regulation, thinks they may flout guidelines requiring “balance and disclosure of risks”–although she hasn’t ordered them off the air. E*Trade put out a new ad, warning you not to quit your job and trade stocks for a living. Thanks a lot, but I still think Mama’s gonna go broke. When she sues, I’ll testify on her behalf.
