Network: The pyjama game

Imagine you could make a fortune on the stock market without having to leave home. Thousands of Americans are trying to do just that, chucking in their jobs to become `day traders'.
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The Independent Culture
How would you like to go to work in your pyjamas, make millions at the click of a button and never have to worry about a boss breathing down your neck?

In the United States, an increasing number of people - perhaps hundreds of thousands nationwide - are trying to do just that, "day trading" on the stock market.

Across the country some 80 brokerages now cater specifically to day traders by offering courses, advice, high-speed computer terminals and access to markets in return for a commission on trades. Through the Internet, all that you need is to open an account with an online broker.

But it's a risky business. Wall Street experts estimate that as many as nine out of 10 people who try day trading - where individuals actively trade their own accounts, rarely holding an investment for more than a day - will fail miserably.

"We've seen people lose their life savings, automobiles, borrow against their credit cards in a continuing downward spiral," says Denise Voigt Crawford, Texas securities commissioner. Crawford faults the brokerage firms for chronically under-representing the risk of day trading. "They talk a lot about the upside potential, but very little about the downside risk."

In Massachusetts, regulators have launched proceedings against five firms. In one case, against the now defunct Block Trading, investigators found 67 out of 68 of the office's traders were losing money.

But who's thinking about losing? The idea of sitting at home and making flash decisions that could net a month's salary in a couple of minutes is highly alluring.

"Every Tom, Dick and Harry wants to quit his day job and make a pile of money trading stocks," says Rick Ackerman, who publishes the financial newsletter, Black Box Forecasts. "It's going to get increasingly hard for them to make money - with a million people trying to nickel and dime their way to riches, those small movements are going to get increasingly hard to find. "

Day trading is now said to account for 25 per cent of the volume on the Nasdaq market, where most of the Internet stocks, prized for their huge daily fluctuations and soaring prices, are found. About 7.5 million Americans now trade online, up from about 1.5 million in 1996. Full-time day traders, many of whom have quit their jobs to roll the dice with their savings, are estimated to number at least 5,000.

Their influence is increasingly drawing the ire of regulators. Frank Zarb, chief executive of the National Association of Securities Dealers, recently railed against the extreme volatility of the Nasdaq, fuelled by day trading. Arthur Levitt, chairman of the Securities and Exchange Commission, summed up his cautionary statement on Internet trading in this way: "Investment should be for the long run, not for minutes or hours."

But don't tell that to Shari Smith, 50, of northern California. While Smith's style is undeniably unconventional, her results have been impressive. Since starting in July, she's turned an initial $200,000 investment into a $530,000 nest egg.

Smith watches the market every day on a financial news television station that shows a live ticker of both the NYSE and Nasdaq exchanges. She is an avid reader of investment chat rooms on the Internet, but has never read a book about investing, nor does she even read the newspaper.

"I get flack about my style, mostly from men," she says. "They seem to feel [investing] has to be complicated. ... You just have to go with the flow of the market; people get into a lot of trouble by being too analytical about this."

Certainly, typical day trading investments defy conventional stock analysis. Share prices of Internet companies, for example, fuelled by day-trader money, have exploded traditional notions of valuation. Non-internets, for example, are considered reasonably priced at a P/E ratio (share price to earnings per share) of about 10 to 15. Late last week, AOL had a P/E of more than 200 and its stock, at $116 a share, was worth a staggering $126bn - more than the value of Ford and GM combined.

Day traders undergo a steep learning curve - typically losing money through their first six months. But experts say those who can keep their heads above water for the first year stand a good chance of surviving. There are lots of ways to fail - aside from not picking winners. Many investors lack the discipline needed to stay with a single coherent strategy.

Also, because they trade so heavily, day trading profits are often eaten up by short-term capital gains taxes, commissions and market-makers' spreads (the difference between the price at which a stock is bought and sold).

Jim Lee, who is president of the Electronic Traders' Association and the Houston-based Momentum Securities Management - which runs 10 day- trading offices - acknowledges that the early days are fraught with danger.

"I don't care what office you're in, at what firm or what system, it's going to take you four to six months to get over that learning curve," says Lee. "That can be very painful. It can be a $10,000 to $50,000 downside."

Tom Weeden of San Mateo, California, has been day trading for almost five years. He quit his job in graphic arts printing and, with a stake of about $20,000, set himself up to play futures commodities and the stock market. On some canny trades and a leveraged position on the disk-drive maker Iomega, he ran up his holdings to almost $1m a couple of years ago and then went on to lose almost everything when the Iomega stock tanked.

These days he's up at 4.30am - two hours before the markets open on the West Coast - reading the business press and scouring the Internet for tips on the day's trading. His computer screen is crammed with 13 windows showing graphs, changing portfolio returns, news flashes and other "crucial" market information. He puts in 12-14 hours a day and several hours over the weekend to try and stay ahead of the curve.

Despite the work and his years of experience, Weeden earns a middle-class living - about $30,000 to $60,000 a year - not much more than he used to make in the printing business. Nevertheless, he answers to no one and has the potential for a huge pay day if he keeps at it.

"It's a matter of being happy," Weeden says. "Happiness is way more important than money. Other than the market, I have no stress."