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Online investing

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From Diana J. Choyce
Apr 03 - 09, 2000

Online investing has become the new feeding frenzy of the internet as of late. It began with the new kids on the block and now the old line companys are jumping on the bandwagon. It may be out of fear that the new guys will take over their profit and customers. Or it may be that investing with a click is the easiest and most profitable way to go. Trading sites offer resources, reviews, graphs, and all the needed information to make informed trades. And they can offer it at lower prices which make for higher profits. But given the amount of advertising seen via television, and the perks they are offering, they are willing to gamble quite a bit to make their mark in online investment. Just as in any internet venture there are pitfalls and problems galore. From fear about security and insider trading, to glitches in website performance and prolific scams. However consumers are coming in droves much to the delight of investment firms.

The first case on insider trading was filed only last week in the state of New York. A large group of people, in fact the largest ever, were charged with profiting on illegal tips on an 8.4 million dollar scheme. The scheme was hatched in an online chat room involving at least 19 people from New York to Tennessee. The main culprit was a computer graphics worker whole stole merger information from the firm of Goldman Sachs and Credit Suisse First Boston. Manhattan U.S. Attorney Mary Jo White said the 2 1/2-year scheme was "insider trading millennium-style'' because it was the first criminal Internet case charging illegal trading on non-public tips. She said it was also the largest criminal insider trading case ever brought, both in terms of the number of defendants and the number of deals. The investigation is continuing, she added. "This is also a case that shows the new face of the market where investors and market players are from every walk of life: schoolteacher, film producer, actor, accountant and often part-time day traders on the side,'' White said. "These defendants talked the talk and walked the walk of the financial marketplace.'' She said that two of the defendants even traded on the confidential information in accounts under the name of "Blue Horseshoe Investments,'' after the code name for insider trading used by actor Michael Douglas in the movie "Wall Street.'' The architect of the scheme, 34-year-old John Freeman, pleaded guilty on Tuesday afternoon to stealing information about 23 deals through both highly sophisticated and very simple means that ranged from piercing the investment banks' codes used to hide their clients' identities to rummaging through co-workers' desks and even the garbage. He admitted passing tips to investors in a chat room as well as to a neighbor, acquaintances made through his wife, and friends he had made while employed at Philip Morris Cos. Inc. and at a popular Manhattan bistro, Les Halles, where he worked as a waiter. Freeman made the least amount of money in the scheme, about $70,000 to $110,000, while others involved made as much as $946,000.

Day Trading seems to be the newest rage. It involves buying and selling stock throughout the day and risking, normally borrowed money, that these stocks will turn a quick profit. These stocks are owned for literally seconds or minutes, just long enough to reap a benefit or get out before losing too much. People have actually used daily living expenses, retirement money, take out a second mortgages, or use their student loan money for day trading. When they lose, they lose big. The basic strategy is to look for stocks that are either moving up or down in value. They want to ride the momentum of the stock and get out before it changes course. They do not know for certain how the stock will move, and risk a lot that it will move in one direction, either up or down in value. They also rarely keep ownership in a stock overnight as the risk would be too high for radical price changes. The riskiest part of day trading is using the leverage of borrowed money to make profits. They tend to lose large amounts of money and can end up in serious debt. And the stress of hanging on to every stock feed throughout the day can take its toll.

Online trading scams, or e-scams have also moved to the forefront. For every good internet venture idea there is always someone looking to find the loopholes and make illicit profits from it. In October 1998, the Securities and Exchange Commission helped investors understand the magnitude of Internet investment fraud when it filed charges against 44 stock promoters who failed to disclose to investors that 235 companies had paid them millions of dollars in cash and stock shares in return for Internet-based promotion efforts that were designed to raise stock prices. Given the low cost, easy access, and the attention of millions of viewers, the internet provides a ripe arena for con artists. In response to the growth of online investment fraud, the SEC, Federal Trade Commission and National Association of Securities Dealers have all devoted resources to help reduce fraudulent activity. Still, investment scams likely will continue to proliferate, so investors need to educate themselves about the types of scams that exist, and investigate all investment opportunities and information disseminated through the Internet.

Online investment can be a wonderful time saving tool. And many sites such as Ameritrade and E*Trade are making great profits for both themselves and their customers. It's easy, fast, and always available, The perfect blend to draw people from every walk of life who have never had the opportunity to play the stock game. But as with everything thing internet, the buyer must beware and educate themselves. And the old adage, never risk more than you can afford to lose, must remain the key principle here.