Borrow-to-buy fear as investors surge online

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The Independent Online
People who fear they may be missing out on the stock market boom because of a lack of cash flow need worry no more. American online brokers are set to start lending money to help people buy shares. This practice, known as margin trading, will help boost volumes and allow people to buy more shares. If share prices continue to rise then investors will get their profits, minus the stockbroker's commission. However, it leaves people vulnerable if there is a sudden downturn.

The news has delighted prophets of doom, who love to recall Wall Street's 1929 stock market crash, which was partly fuelled by leveraged bets of private investors using money they had borrowed. Even some brokers are expressing alarm. "Margin trading means you can borrow against your portfolio to buy more shares," says Justin Urquhart Stewart, business development manager at Barclays Stockbrokers. "This is fine when the market is going up. You try selling when it is going down."

British firms tend to allow longer settlement periods than their American counterparts, sometimes offering 20 days to settle their accounts. Some investors take advantage of this by buying and selling within the 20-day period. American houses tend to offer shorter settlement periods, preferring three rather than five, 10 or 20 days. "British clearing banks will probably have to offer margin trading to maintain its customers," says Julian Palfreyman, director of Winterflood, one of the largest brokers.

TD Waterhouse, the American firm that has just bought Yorkshare, will offer a margin trading facility in the new year. E*Trade, America's second biggest internet broker, is expected to follow. Even more unsettling for doomsayers is the news that Options Direct will start offering options trading online. This will allow people to bet on calls, puts and futures of stocks and commodities.

Some British stockbrokers have not anticipated the sudden demand of the private investor. Many investors are complaining that brokers are slow to respond, either via the phone or the internet. "I have a certain sympathy for both the brokers and the investors," Mr Palfreyman says. There are fears that the explosive growth in share trading will create a number of problems, such as settlement delays and problems with liquidity. Some shares trade in much smaller volumes than others. If you buy an illiquid stock, it can be difficult to sell.

Share dealing by private investors has more than doubled in the past two months, as investors pile into hi-tech, telecom and internet shares. Howard Davies, chief executive of the Financial Services Authority, has issued a number of warnings on the risks in recent weeks.

Will these warnings be enough to deter the new breed of traders? One investor, who wants to be known only as Sayed, doubts it. "I have made more than half a million pounds in six months. I have no plans to pull out of the market. In fact, I shall take advantage of the chance of leveraging my portfolio."