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Although online trading is hot, you may get burned
By Brian Livingston
August 4, 2000, 4:00 AM PT

Online stock trading is exploding, but some customers are saying: "The computer ate my investment."

Analysts project that one in every four trades in U.S. stock markets will be initiated online by the end of 2000, according to a study by the New York State Attorney General. That compares with only 7 percent as recently as the first quarter of 1997.

Many online trading customers, however, complain that they sometimes can't get a response from their broker's system in a reasonable amount of time. This has cost some investors thousands of dollars as their portfolios fall while a broker's Web site plays dead.

You often see ads for online brokers implying you can "get rich quick," but you never see ads saying you can "lose money quick."

To add insult to injury, it turns out that some of the recent spikes in the first-day prices of stocks weren't entirely because of good old exuberance.

The U.S. Securities and Exchange Commission announced July 24 that it had reached a remedial settlement with L.T. Lawrence & Co., a New York broker-dealer company.

In the settlement, the two principals of Lawrence agreed to be barred from the broker-dealer business and pay more than $370,000 each for manipulating the first-day price of companies it had taken public on the Nasdaq's SmallCap Market.

Lawrence took orders from its retail customers for shares in each company before taking it public. Then, in a method the SEC calls "pump and dump," the brokers inflated a company's price by purchasing thousands of shares as trading began.

The SEC states that Lawrence later that day sold these shares to its retail customers at prices up to twice the initial public offering price. The company's profit: a cool $1.2 million in one day.

This shows that some people do get rich quick in online trading, just not you.

Of course, the problems of trying to make a quick buck in the stock market are well known. Online trading just makes these problems worse.

You've heard a lot about so-called day trading, in which speculators buy and sell shares on the same day, hoping to outwit the market.

But you seldom hear that only 11 percent of day traders make profits, says Jeff Ford, citing a study by the North American Securities Administrators Association. Ford is a Web products consultant for the American Cash Flow Institute, a private firm that specializes in mortgages and other long-range investments.

Despite all the hype, day traders actually account for a small fraction of online investors.

Arthur Levitt, chairman of the SEC, testified before Congress last year that there are "more than 5 million investors using the Internet for brokerage services…with the number of day traders estimated to be less than 7,000."

For serious investors who don't expect instant riches--but just want to see their savings grow over time--what are the best ways to guard against online trading problems?

First, check independent ratings. One nonprofit Web site, the Investing Online Resource Center, lists a dozen sources that rate online brokerages.

"You should do your homework" at this site before selecting a broker, says Bill McDonald, enforcement director of the California Department of Corporations.

Second, settle on a personal investing style. Investors with divergent financial needs may want completely different brokerages.

For example, the rating system used by gives top overall scores to the online operations of Charles Schwab, E*Trade and Fidelity.

But Kiplinger Magazine, using a different methodology, hands top honors to Discover Brokerage (now part of Morgan Stanley Dean Witter), Muriel Siebert & Co. and Mr. Stock.

Finally, consider reliability. publishes tests of online brokerages. In one recent survey, several brokerages completed a near-perfect 99.9 percent of the transactions Keynote tested. But one company could complete only 77.3 percent.

It's a complex process, but once you've done your research, you have a good chance to get rich slow.

Consumer advocate Brian Livingston appears at CNET every Friday. Do you know of a problem affecting consumers? Send info to He'll send you a book of high-tech secrets free if you're the first to submit a tip he prints.

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on the soapbox
Brian Livingston has published 10 books, including "Windows 2000 Secrets" and "Windows Me Secrets." He has been a contributing editor at PC World, Windows Magazine, InfoWorld and other magazines for more than 10 years. Before his work as an author, Livingston was a management consultant advising financial institutions on computer technologies. In 1991, he received the Award for Technical Excellence from the National Microcomputer Managers Association for his efforts to develop standards in the computer industry.


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