Log On And Profit - growing number of online investors

Black Enterprise, July, 2000 by Jeffrey Mckinney

A beginner's guide to online investing

BRANDON LEDYARD BUYS AND TRADES STOCKS SUCH AS JDS Uniphase (Nasdaq: JDSU), TriQuint Semiconductor (Nasdaq: TQNT) and Ariba (Nasdaq: ARBA) online. The profits from his investments have afforded him certain luxury items, without tap ping into the family budget.

The 28-year-old school psychologist and self-directed investor paid $3,000 for a 1982 granite BMW with only 60,000 miles, which he bought from a friend. "The stock market has given me that extra cushion to get fringe benefits I couldn't get before," he says.

As an online investor for the past two years with Charles Schwab, Ledyard expects his passion will continue to pay off. Already, Ledyard's investments have helped allow his wife, Barbara, to stay home and care for their three-year-old daughter, Lauryn, and 14-month-old twin sons, Zavier and Zion.

RANKS OF ONLINE INVESTORS SWELLING

Ledyard's is just one of a growing number of American households joining the burgeoning ranks of online investors. The number of North American households involved in online trading is expected to grow to 4.3 million by the end of this year, up from 3.5 million in 1999 and just 500,000 in 1996, according to a 1999 report from Forrester Research in Cambridge, Massachusetts.

Thanks to a bullish stock market in recent years and the Internet's growth, a stampede of consumers is logging on to turn a quick profit or realize the potential of retiring with a hefty nest egg.

There are several critical factors potential online traders should consider before choosing an online broker, such as continuing to do business with a professional broker or trading with both online and offline brokerages. Investors need to carefully evaluate their investment styles as well as short-term and long-term financial goals.

Though personal advice is a big priority with most online investors, most trade electronically because of lower fees, greater convenience, real-time access to accounts and research capabilities, says Kenneth Clemmer, an analyst at Forrester who did an in-depth report, "Investors Grade eBrokers," for the research firm. Clemmer surveyed about 100,000 North American households, plus 10,000 online consumers. The survey was conducted from late December 1998 through mid-January 1999.

FROM CAUTIOUS TO AGGRESSIVE

The study found that out of all investors with Internet access, most fit into one of these categories:

* Retirement by the book. These are online investors who follow reasonable strategies to obtain a comfortable retirement, making up 13%. Their investments on average are a modest $49,235.

* Aggressive affluent. This group makes up 32% of online investors. They take risks, trade almost 10 times a year on average and have a mean net worth of more than $320,000.

* Portfolio cruise control. The most risk-averse, comprising 11% of Internet traders. They trade moderately and only to maintain their considerable investment portfolios, which average more than $320,000.

* Get rich quick. These investors are typically the 20-somethings, day-trading crowd, representing 15% of online traders, and another 13% use both online and offline brokers. They trade frequently despite their modest net worth of $38,277.

Among the study's other findings:

* Online traders tend to be young, educated and wealthy professional men. They trade twice as often as their offline trading peers.

* Convenience is the biggest draw for online traders. About 45% of them have switched brokerage firms in the past. Almost one-quarter of them did so because they could not trade online.

Clemmer says the findings show how fast online trading is growing and why it will continue booming and keep making up a larger percentage of all stock transactions. Indeed, business is brisk. The number of online accounts reached 5.4 million and assets jumped to $374 billion in 1998 according to Forrester data. But those figures are projected to swell to 13.7 million accounts and assets of $309 trillion by 2003.

TRADING FOR EXTRA CASH

As a relatively new online investor, Sylvia Thomas, 52, could fall between the retirement by the book and aggressive affluent categories. She manages the office for her husband's business, Lanny's Hobby Shop, an auto body shop in Los Angeles.

Thomas first invested in stocks with cash she accumulated in her 401(k) and defined benefit retirement plans at Pacific Bell Telephone. When Thomas left the utility four years ago to help her husband, she was determined to build up her portfolio. At that time, she moved her money into a Merrill Lynch IBA, investing in blue chip stocks like Disney (NYSE: DIS) and AT&T (NYSE: T) and avoiding risky investments.

But when she didn't get the returns expected, she decided about two years ago, to be more aggressive and subscribed to Merrill Lynch Online. Using the online brokerage service allowed her to research and trade stocks on her own while maintaining her relationship with a professional Merrill Lynch broker.

The transition also allowed Thomas to expand and diversify her portfolio, which today includes Microsoft (Nasdaq: MSFT), Qualcomm (Nasdaq: QCOM), Home Depot (NYSE: HD), the John Hancock Small Cap Growth Fund and the Federated High Income Bond fund.