STATE WARNS ONLINE INVESTORS TO LOOK BEYOND PROMISES OF ADS ONLINE BUYS NOT FOR NEOPHYTES.
With online brokerage firms poised to spend a record $1 billion on advertising this year, state regulators are cautioning investors to look beyond the claims of how easy it is to get rich investing online and beware of risks that are magnified by the new technologies.
To help investors make their way through the sea of advertising claims, the state Department of Corporations recently published a list on its Web site, www.corp.ca.gov, of five risks to trading online. It also has begun an education campaign for new investors.
The department said a number of advertisements imply incorrectly that anyone who isn't trading online is hopelessly old-fashioned and behind the times.
They also ``create the impression that making money on the Internet is as easy as clicking a mouse,'' said Julie Stewart, the department's assistant commissioner for public affairs.
Stewart said with the current hot stock market and competition for clients, some ads from online brokerage firms clearly imply that online investors will become rich enough to own islands and bail out small countries.
Securities and Exchange Commission Chairman Arthur Levitt agreed, saying, ``Advertising by online brokerage firms has been responsible for more and more people entering the markets with overly aggressive expectations.''
In a speech in November to an investors' town meeting in Albuquerque, N.M., Levitt said, ``With some of the online brokerage commercials that are showing up on TV these days - visions of owning your own island or amassing a small fortune overnight - it's easy to see how people can get caught up in the excitement.''
The state agency isn't trying to scare people away from investing online, said Stewart, but ``people need to know what they're getting into.''
Michael Dunn, a spokesman with New York-based Datek Online, wouldn't comment on other online firms or their advertisements.
Dunn would only say that at Datek, '``Our advertising is designed to communicate to the individual investor that they have access to the same information as the professionals do.''
Numerous messages left last week by the Daily News seeking comment from other online brokerages about their advertisements - including DLJDirect.com, Web StreetSecurities.com and E-trade - were not returned.
Stewart said firms may use advertising to tell customers they have the same access to information as the professionals, but the risks of online trading usually aren't mentioned.
She said the state of California is trying to make investors aware of some of the risks that are amplified by the online format, including hidden costs, trading too much, technological limitations, and the fact that investing independently isn't for everyone.
Stewart urged investors who are entering the markets for the first time using online brokerage firms to do the same prudent stock research they would do before investing with a full-service broker.
Dunn of Datek agreed, saying, ``We believe that education is the most important thing an investor can do before they click that mouse to make a trade. Do the research and make an informed decision.''
Also, although the Internet makes it seem as if investors have a direct connection to the securities market, they don't. When an investor pushes the enter key on her keyboard, the order is sent to a broker, who sends it to a market to be executed.
``Today, investors have access to timely information that was virtually unthinkable just a few years ago,'' said Levitt. ``But, I'm surprised when I ask investors who, when, and what they consult before buying a stock. I've found that very few people read the company's annual report or mutual fund prospectus or do independent research.
``It's a fundamental fact of investing. With any investment, you stand a chance of losing your money.''
Although trading online might result in lower commissions and could give greater access to financial information, the state Department of Corporations noted some of the risks to trading online:
--HIDDEN COSTS: Behind-the-scenes but legal payments between online brokers and market makers, so-called ``payment for order flow,'' might reduce the incentive to get the investor the best price when buying or selling a stock.
--TRADING DELAYS: Most online ads suggest that investors have instant access to the market and are directly linked to order desks. Contrary to such claims, investors are not connected ``directly to the markets.''
Online trading simply gives investors the opportunity to place a trade in a firm's trading system. Moreover, delays in order execution can result in worse prices than what investors are seeing on their computer screen at the time they place the order.
Investors can protect themselves by using ``limit orders'' instead of ``market orders'' that allow investors to specify the price or price range at which they are willing to buy or sell securities.
--TRADING TOO MUCH: The message implied by many online ads is that in a hot stock market the more trading an investor does, the better he or she will do. Experience, however, suggests that the more trading an investor does, the less well they do.
Experience also suggests that real wealth in investing comes from careful research and patience in buying the securities of quality companies and holding them for the long term.
--LIMITATIONS OF TECHNOLOGY: There is nothing inherently wrong with online trading, but it is merely an alternative form of trade placement and execution that is dependent on technologies that are constantly changing.
Online investors should make sure that their online brokerage firm has the technological capacity to meet the fast-paced needs of online investing. They should also keep records of orders and confirmations in case there is a dispute about the orders placed online.
--GOING IT ALONE IS NOT FOR EVERYONE: Online accounts with discount brokers are less expensive, but the customer does not have access to the research, due diligence, recommendations, support services and fiduciary relationship of an account with a full-service broker.
The bottom line is that investors must decide whether they have the time, the temperament and the interest to actively manage their own money alone. Otherwise, a traditional relationship with a broker or investment adviser might be a better way to go.
Photo: (color illustration) Putting your money where your mouse is
Box: SAFE SURFING (see text)
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|Publication:||Daily News (Los Angeles, CA)|
|Date:||Jan 10, 2000|
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