A Guide to Online Investing Getting Started Choosing the right broker on the Internet isn't easy. Online brokers chart Researching companies online; websites that can help. Beware of online scams. Features Diary of an online broker. Charles Schwab, one of the first online traders. Sunday Columns Cash Flow: Finding personal finance information online Mutual Funds: Tracking information on mutual funds online. Investing: Glassman writes about trading stocks online.

By David Segal
Washington Post Staff Writer
Sunday, August 23, 1998; Page A1

Pat Riley just made a small killing in his bare feet. Tapping on his keyboard one recent afternoon, he unloaded 500 shares of Lucent Technologies Inc. purchased the day before. Net profit, after commission: $472.

"If I could do this every day, I'd make $150,000 a year," he said, chuckling.

It could be a scene from any brokerage house, except that Riley is sitting in the pine-walled den of his home in Chapel Hill, N.C., wearing a T-shirt and shorts. His only companions are a pair of squawking gray parrots and a television tuned to CNBC's nonstop Wall Street coverage.

This has been Riley's makeshift trading floor since April 1997, when he sold his stake in a mobile ultrasound company, bought a spiffy new computer and began investing online with his family's $100,000 nest egg.

It hasn't gone smoothly. He lost half of his money in the first few months, most of it in a single day of panic selling at the bottom of last October's brief market free fall. Using his house as collateral, he borrowed $50,000 to invest, which he has since paid back. Having learned some lessons, his portfolio gradually rebounded to $174,000, a gain of 74 percent.

"This," he said, "is about the most exciting job I've ever had."

For decades, many Americans considered Wall Street a bewildering jungle best viewed at a distance, with a professional guide to point out the sights. Now throngs of investors are dumping their brokers, booting up computers and plunging solo into the stock market.

Five years ago, Internet trading didn't exist. Today there are more than 3 million online accounts, and by 2002 that number is expected to rise to 14 million with nearly $700 billion in assets, according to a report by Forrester Research. Already, nearly one quarter of all retail stock trades are made in cyberspace.

To aficionados, it's the most exhilarating computer game ever. With a few clicks of a mouse, any amateur with a hunch and a few thousand dollars can sign up to barter in capitalism's grandest Casbah. Trades cost as little as $8 each, a fraction of the $100-plus charged by traditional brokers. Real-time stock quotes are available for tick-by-tick updates and the World Wide Web has piles of data for researching companies.

But hyperactive traders, be warned – all this easy-to-use technology can be hard on the bank account. Experts caution that low fees and the spread of armchair-trading is encouraging some consumers to frenetically buy and sell, a dicey way to prosper in a market that is notoriously chaotic and difficult to time. Capital gains taxes, of course, take a bite from any money-making trades.

Because online brokers charge a pittance, they don't exactly encourage buying and holding, the mantra of financial advisers for decades. An Ameritrade television ad featured a young investor gloating about the stocks he owned and sold in a few hours: "I traded my Fiat for BMW, unloaded BMW for Mercedes, all before lunch." That's why as Congress acts to restrict online gambling, a few critics wonder if there is much difference between playing cyber-blackjack and the quick-buck approach to online trading.

"It's a lot like going to a casino," said Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. "You can make or lose money within a few seconds and there are going to be some people who are addicted it."

Others point out that anyone with a set of darts could have profited in equities over the past seven years. What will happen to online investors if a nasty, grinding bear market wrecks the party?

They'll stand pat, said executives at Internet firms, who remind anyone who asks that individual investors stuck around during recent swoons, even as professionals ran for the exits. Richard Kahane, a retired federal worker in McLean, for example, watched the market sink two weeks ago, turned off his computer and went gardening.

"What I was going to do, look for a 13-story building to jump off?" he asked.

Further, online executives said, brokers have offered plenty of lousy advice over the years.

"Internet investors do their own research and get emotionally attached to their stocks," said Christos Cotsakos, the evangelical chief executive of E-Trade. "That's far better than having some broker call up and say, 'Hey, there's this company that I'd like you to look at.' "

Not surprisingly, the online trading boom is rattling the multi-billion-dollar financial services industry and causing dyspepsia among traditional brokerage houses such as Merrill Lynch & Co. and Morgan Stanley Dean Witter. For years those companies charged hefty premiums on the theory that consumers want advice from a salaried expert, not just someone to administer their portfolios. Jumping into online trading risks underselling and undermining the army of brokers who provide their core business.

"We believe that most investors want a knowledgeable adviser and partner to give them advice," said Launny Steffens, vice chairman of Merrill Lynch, which plans to offer Internet trading, though not at discount prices. "There are relatively few examples of people who trade every day being super-successful at it."

Who are these do-it-yourselfers? Until six months ago, said industry experts, the typical online investor was male, college educated, from 32 to 42 years old, with an annual salary of $75,000. These days the crowd has been joined by legions of homemakers, retirees, precocious teenagers and disgruntled employees dreaming of going pro. For many, the daily ritual of logging on to check the portfolio has become as crucial as a morning cup of coffee.

"I'm sitting here writing an employee review and I can switch screens and take a look at how my stocks are doing," said Chester Lee, a warehouse supervisor at a chemical manufacturing firm in San Francisco. "This technology is wonderful."

Apparently, it's also handy for training aspiring capitalists. Though not yet old enough to drive, 14-year-old Tanveer Ali of Toronto was given $25,000 to invest by his father and grandparents last year. Trading on his father's account and using the cash as collateral, he borrowed another $50,000 on margin from his online brokerage service and claims he has been trouncing the market ever since. "I'm up 29 percent for the year," he said. "Because I'm so young I can afford to be a bit more aggressive than most people."

Working a summer job at a public relations firm, Tanveer keeps an eye on a handful of blue-chip companies, like International Business Machines Corp. and Pfizer Inc., which he buys on dips. To stave off big losses, he has programmed the account to sell any stock that drops more than 5 percent from his buy-in price. If it goes up 3 percent, he pockets the profit.

"I'm quite proud of him," said Mehboob Ali, Tanveer's father. "My biggest worry is that he'll drop out of school. I constantly tell him, 'There's plenty of time for you to be a Warren Buffett if you want to be.' "

Stodgy old blue chips aren't scintillating enough for Sandra Mailloux, a 54-year-old grandmother who trades stock options all day, every day from her 40-acre ranch near Dallas. Having chucked her career as an office manager, she now rises each morning at 7:15 and is planted at her desk by the opening bell. Bombarding herself with information, she pores over financial newspapers and reads newsletters that arrive via e-mail three times a day.

"If I want to gamble, I'll go to Las Vegas," she said. "This is a job."

As with any job, online investing has its own hangouts and its own version of office gossip. Each day thousands of investors "meet" in Internet chat rooms to exchange ideas and vet rumors. The Silicon Investor, for example, gets more than 10,000 posts a day from its more than 100,000 registered members.

The online world also has its own heroes and the most beloved are the anchors of CNBC's chatty morning financial show, "Squawk Box." On the Web site for Silicon Investor, Cleveland homemaker Barbara Andre logs on as "redhead" and leads a discussion titled "CNBC Guys: The Hunks of Financial Television." "Joe Kernen, Mark Haines, David Faber – those guys are terrific," Andre said, referring to the show's hosts.

For the multitudes who both trade and hold down a day job, the hard part is tuning out the market while at work. It hasn't been easy for Vien Doan, a California physician.

"I've gone through periods where I do nothing else but think about stocks," Doan said. "After a while I had to pull myself back."

On a typical day, Doan rises before dawn so he can place a few 6:30 a.m. trades as the market opens on the East Coast. During his lunch hour, he again checks his holdings. In between, he forces himself to focus on his patients.

Doan got hooked last August, he said, after he bought shares of Dell Computer Corp., hung on to them for a couple days and then cashed out for a quick $2,000 profit. Overall, he said, he is beating the market and some months his stock earnings outpace his paycheck. There have, however, been some hairy moments, most notably the day he lost $3,000 betting the wrong way on Intel Corp. stock options.

Nearly every online trader has a gut-churning war story to share. For warehouse supervisor Lee, the enemy was Baan Inc., a software maker that he thought was vastly overvalued. He took a "short" position on the shares, effectively betting that they would fall, only to watch them double in ensuing months. His losses totaled $35,000 before he sold his position.

Since then Lee has honed his methods for finding and wagering against what he calls "broken companies," and this year he's made $40,000 on in the market, a return of 25 percent.

"If get to $100,000 this year, I told my wife that I'm going to quit my job," Lee said.

All the talk about the possible end of a 15-year bull market daunts few of these financial frontiersmen. There now are about 220,000 online trades each day, roughly double the figure from a year earlier, and more firms are rushing to serve these customers.

Riley, for one, isn't giving up the four-second commute to his office from his bedroom. After a falling out with a former partner, he vowed never to work with anyone else again. Then, taking a look at his broker, he had a revelation: "He's a nice guy and a good guy, but he's not any smarter than I am."

And if the market crashes? "I guess," Riley said, "I'll have to find something else to do."

Staff researcher Richard Drezen contributed to this report.