Donna Block:SHARE WORLD
Have you got nerves of steel, a cast- iron stomach and access to a computer with a connection to the global network? If so, then you can become part of a small but growing group of independent investors known as “day traders”.
Unlike traditional or online investing, where investors hang on to stocks for months or even years, day trading is the practice of buying and selling stocks, bonds or other securities on a moment-to-moment basis.
Day trading is the investing equivalent of going to the races. It’s fast and furious, with the potential to rack up big gains and the likelihood of scoring even bigger losses.
Like any get-rich-quick scheme, this one has some United States regulators worried. They say the lightning-fast business is nothing more than a gamble for anyone other than top-notch brokers. They’ve stepped up their scrutiny of day trading, worrying that smaller, fly-by- night firms are attracting too many naive investors and creating unrealistic expectations with adverts promising quick riches.
However, ordinary investors have been bitten by the Internet bug and the lure of making the big money by trading – mostly Internet stocks- has attracted people from all walks of life to try their hand at this type of furious trading.
Day trading is considered an upstart industry. Traditional brokers are very critical and blame some of the volatility in the US stock markets on the wild antics of day traders.
There was a time not so long ago when day trading was reserved for dealers with large institutional investors who had access to the information as well as the fast, low-cost execution technology.
But the Internet has changed everything. Now anyone who wants it has access to the same information as the big boys and in the past two years the US Securities and Exchange Commission has passed new regulations that let smaller investors in on the action.
In addition, some of the most recent studies show that the number of individuals plugging into the Net is increasing daily by tens of thousands. As technology improves, that will rise even faster. The more people on the Net, the greater the likelihood of larger numbers of would-be Donald Trumps dabbling in day trading. To meet the burgeoning demand, a new Internet industry has been born: the day trading firm.
Internet brokerage companies, such as E*Trade Group Incorporated and Charles Schwab, execute orders for individual online investors who aren’t interested in advice from a broker. Other firms like All-Tech and Broadway Trading cater to investors who want to give up their day jobs and trade stocks full time at a computer station in the firms’ local offices, now located in several cities across the US.
For those who prefer to trade in the comfort of their bed with their laptops, links with the companies’ super-fast, sophisticated computer systems can be made via the Internet. The advantage of using All-Tech’s or Broadway Trading’s systems is speed: customers can make hundred or thousands of rapid-fire transactions in minutes in the hopes of making a fast buck.
The ability to make money as a day trader depends on a trader’s ability to move quickly to exploit the tiny differences in the buy and sell prices of an individual stock. This difference is called the spread. Spreads are stated in fractions of a dollar, usually in units worth about three US cents.
For example, an investor sitting at a computer notices that the price bid for a share of a fine company like Executive Consolidated Rubbish, Junk and Crap is $4,375, but it’s being offered for $4,75. Attracted by the spread on this fine firm, the investor buys 4 000 shares of the stock at the bid price of $4,4375 (total purchase price: $17 750) and within seconds turns around and sells those shares at a price just below the offer price, say $4,6875 (total selling price: $18 750). Hey presto! You have a profit of $1 000. (In the heydays of the broker, this tidy little sum helped pay for executive Martini lunches.)
This may sound easy, but it’s not. Day trading isn’t for the faint-hearted. Like other forms of investing, it doesn’t come with a guarantee that returns will be favourable. And because day trading is very speculative and can easily swallow up large chunks of cash, experts say it is not an appropriate investment strategy for, say, savings for retirement or college.
Success requires luck as much as it does skill. Shares can’t always be unloaded at a specified price and market sentiment at the end of the day does prevail. You can be on cloud nine one day and at the bottom of the barrel the next.
Getting started can also be expensive. While some day-trading firms let a customer get started with $25 000 in an account, Broadway Trading requires a customer to have at least $75 000 in a trading account.
Several day-trading firms say that even well-heeled investors can expect to wait six months before they begin making money. And while they’re waiting, it’s not uncommon to lose tens of thousands of dollars. For that reason, some firms, like All-Tech, recommend that new day traders trade only in lots of 200 shares at a time.
Other costs can add up quickly as well. Investors who trade full time from home, for example, can expect to pay an extra $400 to $700 a month in phone costs alone, as part of dialling into a company’s trading system.
Notwithstanding, access for day traders is being made easier. The Nasdaq exchange, which generally has more volatile stocks, has made itself available to small investors through the small order execution system (SOES). This is an automatic system, so all orders are processed on the spot, but it has some disadvantages for investors wanting to play, like a ceiling of 1 000 shares per trade and time restrictions on multiple stock purchases.
These kinds of restrictions are not found in another technology day traders use: electronic communication networks (ECNs), which give smaller investors a chance to post their own stock bids. These networks do not have the time restrictions and limits on the size of transactions.
The result is that day trading has soared in popularity, spawning websites, dozens of day-trading classes and specialised trading firms that offer SOES and ECNs in large trading rooms or through remote connections, with direct access through modems or Internet sites. The payoff to the firms is that the investor pays for expensive training courses and commissions on trades.
If this sounds tempting be warned: it’s a mugs game and to play it you’d better have patience, a wad of cash and a sense of humour.