Trigger Happy Trading
- Internet daytraders are becoming much more common since online brokerages made making instant trades so easy. E-Schwab estimates that 50% of its new users are what they would consider inexperienced. These traders have only known market growth and overvalued Internet companies. If and when the Internet bubble bursts, a lot of online traders could burst right along with it.
- Many online traders have been burned by making market orders instead
of limit orders. For instance, if a trader puts in a market order for
a hot Internet IPO, the price could rise dramatically by the time his
order were actually filled. A limit order includes the maximum price
an investor is willing to pay and limits surprises and financial losses.
Charles Schwab recently posted a LETTER addressing Internet trading
risks.
During the IPO of theglobe.com, the stock's price increased ninefold in a matter of minutes. Investors who made market orders where liable for buying the stock at the higher price. Many traders lost money almost instantly, because the stock price quickly fell. E-Schwab has undertaken a significant education effort to encourage clients to make limit orders. Schwab spokeswoman Tracy Gordon says this effort has payed off: during the recent IPO of financial services firm MarketWatch.com, only limit orders were made.
- Online traders are subject to even more risk when they're not investing
with their own money. Traders can borrow money from their brokerages,
paying less than the full price of the stock out of pocket. This is
known as trading on margin.
However, if the price of the stock falls, the brokerage can issue a
margin call -- an immediate demand of payment for a significant portion
of the borrowed money -- which traders are often unable to pay.
Salomon Smith Barney, an established brokerage with an online presence, recently evaluated the risk associated with its high number of margin accounts and concluded that if Amazon.com and Yahoo were to drop 30% or more, several accounts could be wiped out. The firm has responded to this problem with higher margin requirements for several Internet stocks.
- Forbes suggests that daytraders'
infatuation with high-tech stocks explains the over-valuation of Yahoo!
and Amazon.com, while at the same time it is possible for the 50-million
strong mob to decimate a company's stock.
Labor Ready, a company that has nothing to do with the Internet, had its stock drop from $30 to $12 practically overnight because of false rumors spread about it on Yahoo! message boards by short sellers. This, despite efforts by the company to show that the rumors were patently false.
Essentially, daytraders can greatly exaggerate any trend in a company's stock price or even create one. Because the traders do not care about anything in the long term, the identity and long-term viability of a traded stock has nothing to do with the strategy pursued. It is easy to see the disastrous effect this could have upon any company.
