Networker: Speculate!
Speculate!
Emblazoned across the awning is a banner advertising stock market trading: "Don't spectate, Speculate!".
The stock market has always been a giant gambling den but in recent years there have been two twists, both related to information technology. The first was the establishment of stock exchanges, such as the US Nasdaq, devoted to high technology stocks. The second was the introduction of share trading over the internet.
Stock brokers who have failed to take advantage of the internet are quick to point out the limitations of internet trading. A gambler (sorry, investor) is unable to benefit from investment advice.
While this is obviously self-serving criticism from a particularly bloated and lazy section of the finance "industry", what passes for expertise among high-tech share traders is monumentally stupid. For example, "The trend is your friend" simply means that when a stock is rising, you buy it, then you sell it before it starts falling again.
High-tech stock trading and the use of the internet come together in the recent appearance of "day traders". These people buy stocks, hold them for a few days or hours, or less, then sell them. While the individual cost of each transaction is lower than using a traditional broker, the cumulative cost is much higher, as the gambler sells and buys dozens or hundreds of times more often than a traditional (richer) investor.
In the extreme case, day traders start with money or credit in the morning, buy and sell shares throughout the day, and at the end of the day sell everything and hope they have more money than they started with. In order to cover the cost of each trade, the whole system can only function when the total value of shares is rising.
Free marketeers boast that the stock market is the most efficient means of allocating available investment to productive purposes, so let's look at one recent company float.
Financial chat page HotCopper was launched on the stock market in Australia in December. Its prospectus (the float information) stated that its total cash income from customer services was $5450. The value placed on the company's shares on the first day of trading was $16.3 million.
This sort of speculation has encouraged Australia's "blue sky" mining companies to get in on the act. The best known of these was Davnet, a floundering company whose shares rose from below 20c to $1.78 (for a total value of around $500,000) after its rebirth as a technology company. Literally dozens of Australian mining companies have followed this lead.
The phenomenon of day trading is quite recent. Its tremendous success is due to a peculiarity of the US stock market in the past couple of years: in six months around the end of 1998 and early 1999, the value of the shares of the major information technology stocks increased by an astounding 1000%. Investors in these stocks could therefore make enough money to cover brokerage fees and come out ahead.
But as soon as values started to fall, the story changed. In mid-1999, Mark Barton, a US day trader in Atlanta, killed nine people in two stock broking offices. The previous day he had killed his wife and children. In a year of trading he had lost US$400,000, 25% of it in the few weeks preceding the killings.
Shortly afterwards, the North American Securities Administrators Association published a report suggesting that 70% of all day traders would not only lose money, but would almost certainly lose everything they had invested.
By Greg Harris