Mad money accounts.

Clubs venture into the edgy world of online trading 

Don't quit your day job has taken on new meaning for those folks who spend their days glued to their computers, jumping in and out of stocks. These day traders take advantage of very narrow spreads in volatile markets in hopes of garnering short-term profits. They buy a stock and try to ride its momentum (or rapid price movement) and then sell it before it changes course--sometimes within a matter of minutes.

While the mantra for the typical investment club is "invest for the long-term," the RDS Investment Club, Maplewood, New Jersey, has added another element, "invest for the short- and long-term." The group has decided to create two portfolios. One holds several core growth stocks and adheres to a buy-and-hold approach. The other is intended for small, more risky trades and follows a buy-and-sell strategy.

The club's core holdings are: Lucent Technologies (NYSE: LU), Starbucks Corp. (Nasdaq: SBUX), General Electric (NYSE: GE), Wal-Mart (NYSE: WMT), Home Depot (NYSE: HD), AOL (NYSE: AOL) and Halliburton Co. (NYSE: HAL). The club's initial goal was to accumulate 100 shares of each of their base stocks. Thus far, the two-year-old dub owns more than 100 shares in Lucent and close to 100 shares in AOL, Wal-Mart and Home Depot.

"We plan to accumulate 1,000 shares of each stock over time," says Lorenzo Richardson, RDS vice president. "We expect the stocks to grow from a rise, split [cycle]. So, if we buy 40 shares of a stock and it splits [2 for 1], we now own 80 shares. We pick stocks that have growth potential," adds the 29-year-old accountant with Panasonic Corp., Secaucus, New Jersey.

Currently, the value of the club's portfolio is $25,000 with an average rate of return of 35%. Members, professionals who range in age from early 20s to mid-40s, contribute a minimum of $25 a month up to $200 in dues. Members are expected to kick in additional monies every month for their "mad money" accounts. In general, professional day traders must have a minimum of $25,000 to open an account, but individual investors can begin online trading for as little as $100 and the price of a computer.

Richardson says a few of RDS's members already had separate accounts for investing. The club recently formed a short-term trading committee in addition to the investment group and stock market committee to spot trends in the market and quickly capitalize on them, similar to the job of a day trader (See "Life of a Day Trader," July 1999).

Day traders look for a stock that is either moving up or down in value. That may require going long--buying a stock that appears poised to rise in price, or shorting a stock--selling it in what is essentially a bet that the stock will fall in value.

Day traders generally trade on points (equivalent to $1). If a stock moves up one point then you pocket $1 per share. So, a one-point move up on 1,000 shares equals $1,000. Die hard day traders do not invest or hold onto stocks overnight. Some purchase and unload as many as 50 stocks a day.

However, Richardson points out that the club's approach will differ slightly. "We aren't looking just to buy and sell a bunch of stocks at random [minute by minute]. We want to have a more stable approach."

He adds that members will use short-term trading to leverage their funds so they can buy additional shares of their core stocks and to finance future ventures (e.g., entrepreneurial projects). The 20-member club does follow one of the key tenets of investing, which is to reinvest all earnings, dividends and interest. RDS will stay fully invested in its core stock portfolio.

Because of the potential of major short-term losses, the National Association of Investors Corp., a Madison Heights, Michigan-based trade group representing investment dubs, cautions against day trading. It warns that short-term trading doesn't coincide with the investment club's overall objective of long-term appreciation.

Sometimes club members will get caught up in the buy and sell frenzy on Wall Street and constantly trade stocks in hopes of garnering higher returns. But whenever a club buys or sells a stock it has to take into account how that decision will impact the club's overall portfolio, says Baunita Greer, principal with Cromwell, Miller and Greer, a New York-based investment advisory firm. It's important that all members are in agreement, says Greer, who also belongs to the CMG Investment Club and is an active member of NAIC's regional council. "It is not unheard of for investment clubs to split and departing members to deplete the club's reserves, because half of the members were more aggressive investors than the other half," she says.

With millions of Americans trading online, a number of clubs are following suit mainly because of cost. Trades at online brokers E*Trade, Ameritrade or Datek cost under $10. Of course, just because you buy and sell stocks online doesn't make you a professional day trader.

Granted, investors are looking at more lucrative, riskier ways to maximize their portfolios. But before your club plunges into the stock-infested waters of day trading, first master how to build, grow and protect your primary investment portfolio.