A Nation Of Stock Keepers

By John Greenwald

It's as voyeuristic as Internet sex sites, more addictive than video games and a lot easier to play--and you can win big money! It's online investing, one of the hottest destinations in cyberspace. Ask Ardavan Arianpour of San Diego, Calif., who recently turned $1,000 into $5,000 through point-and-click trading. Arianpour is his own broker, trading as often as he likes and poring over online news, quotes and stock charts. "I just love researching and making money," says Arianpour, who has been piling up profits for retirement. That's still a long way off, though, because he is only 18.

The high school senior is one of millions of Americans who have hitched their computers to the tireless bull market. Once the preserve of a few computer-literate plungers, online trading could account for nearly 30% of the projected 227 million securities transactions at retail houses this year, according to Piper Jaffray, a Minneapolis, Minn., investment firm. "It's been on fire," Bill Burnham, a senior analyst at Piper Jaffray, says of online trading. "Hands down, it's the most successful area of consumer-based electronic commerce."

The allure of do-it-yourself trading is transforming both Wall Street and Main Street. Traditional brokerages, whose lock on vital information made them the market's gatekeepers, are changing their approach, and their fees. Meanwhile, a frenzied mob of e-traders has linked itself to a rapidly growing number of web trading sites. Today there are over 60 e-brokers, more than twice the number of a year ago. Many are electronic branches of such giants as Charles Schwab and Fidelity Investments, but others, like E*Trade and Datek Online, dwell mainly in cyberspace. The e-brokerages themselves have been turbulent stocks. Shares of E*Trade soared last year from $11 to $47, for example, and now trade in the mid-$20 range, reflecting the increased competition. The price of Ameritrade, the first Internet broker, doubled to $38 a share after the company went public in March 1997. Ameritrade closed last week at $28.

Buying and selling securities have never been cheaper. Price wars last year slashed the average commission at the 10 largest e-firms from $34.65 to $15.95 a trade. (A trade now costs more than $50 at standard off-line discounters and at least twice as much at full-service firms.) Aggressive discounters on the Internet charge less than $10, and cutthroats such as Web Street Securities charge nothing--that's zilch--to handle trades of more than 1,000 shares of NASDAQ stocks. This rock-bottom pricing reflects the lower costs of e-trading--look, Ma, no broker!--and the fact that firms can glean revenue from noncommission sources like the interest on margin accounts.

This business has lots more room for growth. Commissions from electronic trading nearly tripled to $700 million in 1997 and will easily exceed $900 million this year. Forrester Research, which tracks the online industry, expects that the number of accounts will more than quadruple by 2002, to more than 18 million. There are now upwards of 8.4 million active Internet users with portfolios in excess of $100,000, according to @plan, a Connecticut market research firm. "There are huge numbers of people on the Internet with sizable portfolios who aren't yet shopping for stocks and mutual funds online," says Mark Wright, @plan's CEO. As a result, notes Eugene Ludwig, former U.S. Comptroller of the Currency, the projected growth curve for online trading "looks like a ski slope."

There are plenty of risks for investors in this brave new e-world. So-called boiler-room operators who tout highly speculative or fraudulent stocks in order to unload them at a profit--pump and dump in the parlance--can reach vast audiences through chat rooms and bulletin boards. The Securities and Exchange Commission has been flashing red lights, bringing--and winning--40 complaints alleging scams against stock promoters since 1996. (The rule here: if it sounds like too much of a good deal, it probably is. The agency has a cyberspace alert on its website: www.sec.gov

Clients of e-brokers have run afoul of computer glitches that delay the execution of trades for minutes or hours--while prices shift. Such problems caused anguish last October when jammed lines kept e-traders from bailing out as the market plunged 554 points.

But the biggest hazard of e-trading is trading. The ability to buy and sell stock instantly should not be confused with the word investing. Hooked hackers often trade many times a day in the hope of profiting from fractional changes in the price of a stock--a risky practice called "day trading" that can swell commissions while shrinking portfolios. "The easier it becomes to trade, the greater the danger that you'll trade too much or make poor decisions," Burnham says.

Frequent traders can also miss out on juicy profits, as Ron Garrett, who buys and sells stock while shaving, has painfully discovered. Garrett, professor of engineering at Grand Valley State University in Michigan, bought computer maker Unisys for $5 a share some time ago, only to dump it a few months later when it failed to show a quick gain. "If I didn't have easy access [to trading] maybe I wouldn't have jumped so fast," Garrett says of his sale of Unisys, which closed last week at $23 a share.

To attract and hold such customers, electronic brokers are feverishly building one-stop-shopping sites that offer everything from instant trading to tons of news and data about stocks and mutual funds. Want to check the long-term price performance of General Squid or compare it with Amalgamated Squid? Most sites include links to resources such as Big Charts www.bigcharts.com or StockTools www.stocktools.com that promptly plot the lines. Wall Street City (www.wall streetcity.com lets e-traders rank stocks by price-earnings ratios and popularity with big investors, among other criteria.

As in many businesses, acquiring customers is expensive, so holding on to them is vital. Ameritrade spent $25 million to add 50,000 new accounts in the fourth quarter last year, bringing its total to more than 200,000. That's $500 for each new account, well above the $300 that brokers usually spend to acquire new clients. Such hefty expenditures contributed to Ameritrade's loss of $11.5 million over its past two quarters.

The market leader has been Charles Schwab, which commands nearly a third of the online trade business--or 1.5 million accounts--despite a $29.95 commission, which is three times higher than the deep discounters charge (see chart). Schwab's secret has been to knock down the wall between its online business and its 5 million regular account holders, giving everyone access to the entire range of products and services available at the firm. These include round-the-clock, dial-up brokers and technical support, and a financial supermarket that offers 1,500 different mutual funds.

Meanwhile, Schwab's rivals are rolling out some fancy features of their own. E*Trade, which has more than 400,000 accounts with $10.2 billion in assets, last year acquired OptionsLink, an electronic service that helps companies manage employee stock-option plans. Datek offers free real-time stock quotes--a service that most brokers charge for--and promises to execute trades within one minute or refund the commission. That has helped make two-year-old Datek, which has 80,000 active accounts, the fastest growing e-broker, measured by daily transactions.

The explosive growth of online investing has made personal finance the most popular channel on America Online--easily surpassing news, sports and entertainment. AOL, which provides links to nine online brokers, says more than 5 million subscribers pull up 80 million stock quotes a day and generate some 13 million financial graphs a month.

This ceaseless demand for information has given rise to lucrative alliances between online brokers and data providers. In one such deal, Datek signed a $1.5 million agreement in January to sponsor the stock market ticker on TheStreet.com www.thestreet.com) an electronic magazine filled with news and analysis of stocks and market trends. For its money, Datek gets a button on the site of TheStreet that brings viewers to the broker's home page.

For all their popularity, online firms are unlikely to drive full-service brokers into investment history. "There are always going to be people who don't have either the time or the confidence to manage their portfolios," says Burnham of Piper Jaffray. And with competition growing fiercer, he foresees a shakeout in which the largest e-brokers gobble up smaller ones, leaving investors with fewer online options. But with commissions having fallen to nothing and formerly hard-to-get information readily available, the future of investing is already predictable. E-trading is yet another example of the great leveling power of the Web.

--Reported by Patrick E. Cole/Los Angeles, Marc Hequet/St. Paul, Aixa M. Pascual/New York and Bruce van Voorst/Washington

With reporting by Patrick E. Cole/Los Angeles, Marc Hequet/St. Paul, Aixa M. Pascual/New York and Bruce van Voorst/Washington