Stressful world where a second, penny count

Day trading is risky, with potential for great gain, financial disaster

July 30, 1999|By Bill Atkinson | Bill Atkinson,SUN STAFF

The bull market and the Internet can take credit for spawning the day trading industry.

Day traders are investors, sometimes professionals but more often than not amateurs, who use their own money to execute their own trades. It is a risky, pressure-packed world where every second and every penny count.

When the stock market's opening bell rings at 9: 30 a.m., a day trader owns nothing. The strategy is to buy a stock with the hopes that it will jump quickly, sell it for a small profit, then move on to other stocks. When the closing bell sounds, the day trader has nothing left in his portfolio and starts the next day with a blank slate.

"They try and shave stocks for a half a point [50 cents] or a point here and there," said Robert Mewshaw, president of Van Sant & Mewshaw Inc., a Lutherville-based investment adviser, which manages $134 million. "They might buy IBM at $130 and watch it for 15 minutes to an hour and try and sell it for $131.50. They might buy 1,000 shares of that."

The bull market and Internet gave the mushrooming day trading industry life. There are firms that offer courses on day trading and show people how to set up an operation in their home and make trades over the Internet. These firms have made getting into the business quick and affordable.

The sudden popularity has also created an explosion of trading houses, large rooms set up with sophisticated computer terminals. With these systems, day traders can get the latest news on companies and can see bid and ask prices that only professional traders see.

The firms charge them rent and fees for trades, and they might lend a day trader money, say $50,000 for every $100,000 the trader has in the brokerage account.

But as stock prices fall, the day trader is required to come up with more money, and if he can't, the firm sells his stock.

"This is where financial catastrophes occur," Mewshaw said. "That is what is happening to these day traders."

Financial magazines and newspapers are replete with stories of people who quit their jobs, cashed in their 401(k)s, sold their companies and started day trading.

At first, it looked easy -- day traders were making money buying and selling soaring Internet stocks. But when those stocks dived several months ago, day traders suffered. Some were wiped out.

"It had people confuse this bull market with their own day trading skills," Mewshaw said. "You have people quit their jobs and think they are going to earn a living day trading a stock. It is astounding."

Mewshaw says the pressure on day traders is palpable. "When you are making money, you think you are a genius. When you have a day like today [when the Dow Jones industrial average dropped 180.78 in one session] and have the market turn on you, you have got to be pretty shellshocked."

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