November 15, 2002

Investors have veered away from online trades

Ken Rapoza followed the herd to online investing two years ago when the bulls were running. He set up a $5,000 cash account with an online broker and started clicking. Each month, he bought more stock in two companies that he considered hot: California-based electric utility Calpine Corp. and telecommunications powerhouse WorldCom Inc. You can guess the rest. Calpine stock is off about 90 percent from two years ago. WorldCom filed for bankruptcy in July. That $5,000? Rapozas latest cash account balance was $1.27, and his stock portfolio was worth a whopping $229.51. Like many other small investors now chastened by the numbers, Rapoza, 34, of Westport, Mass., has taken a seat on the sidelines. Its roulette, man, Rapoza said. He has not made a trade in months and does not know when hell get back in the market. Recent years have seen stock trading, banking, credit-card applications, insurance and loan shopping gain major footholds with Internet users. 

But online investing, which roared into the new century as a killer application for the Internet, lately has slumped like a dog on the Dow. Though online brokerage firms are still adding new accounts, many have lost significant commission income because investors overall at the end of June were trading stocks online about half as often as they did two years ago, according to market research firm Gomez Inc. As a result, online brokers, along with data-crunching Web sites and Internet-based financial advisors, are scrambling to find niches to fill, adding services and information for customers more interested in preserving whats left of their fortunes than in trading their way to quick riches. 

We have had to add a number of services, said Rodger Riney, president of discount online broker Scottrade, which now promotes its 160 brick-and-mortar branches and a real-time Web news feed from Dow Jones along with $7 trades. We felt like we had to do some things like that to continue to make our site what we feel is the best value. When stocks were rising, making trades almost became a form of entertainment to people. They purchased something, and it was exciting to go and check your portfolio every few hours, said Ian Rubin, industry analyst at the market research firm IDC. 

But with the easy-money days over, investors are going, OK, now I have to figure out what stock to pick. And thats why, now, the online and the discount brokers need to step up and provide the tools to make those decisions, said Dan Burke, industry analyst at Gomez. Financial planning is kind of the new battleground, he said. At E-Trade Group Inc., where banking, mortgage lending, stock-plan administration and an ATM network have taken up much of the slack from declining stock trades, diversification strategy is what has carried us through this whole process, spokeswoman Connie Dotson said. Yet when it comes to offering financial alternatives to stocks, the Web often presents as many obstacles as solutions. 

Many transactions for real estate, insurance and loans, for example, can be started online but must still be completed offline, on paper. Bonds, with their arcane terminology, rate schedules and payoff dates, are another tough sell on the Web, IDCs Rubin said. Banks dont do a great job of offering bonds online, he said. The future of online trading, meantime, remains as uncertain as the financial markets overall. People were trading a lot when stocks were going up, plain and simple, said Andrew Metrick, professor of finance at the Wharton School of the University of Pennsylvania. Generally, theres this sense that if you are trading and making money, you are doing something right, and if you are trading and losing, you are doing something wrong. Yet a slowdown is not bad for investors, according to Metrick. Studies that he and others did during the bull market showed that investors who trade online trade a lot more, and do a lot worse in the markets, he said. Its just a way to eat up your time and money for no good reason, he said. 

So much information and opportunity online can be dangerous if you dont know what youre doing with it, said Leland B. Hevner, president of the National Association of Online Investors in Washington, D.C. Hevners group offers online learning material for investors to show, for example, how to find and decipher proxy statements of public companies. Hevner picked Microsofts MoneyCentral.msn.com as a site where, by answering questions about their goals, inexperienced investors can be guided to appropriate investment options. Other sites he picked were www.morningstar.com, Quicken.com and the Motley Fool site, www.fool.com. However, he said, advice gleaned from the best of Web sites should not be considered on its own. Investors ought to find a trusted offline financial adviser, and online resources should be used to empower people to interact more intelligently with their advisor, he said. 

The advisor is coming back into vogue, said Bryan M. Place, a financial planner and columnist for the financial advice site www.MultexInvestor.com. Two years ago, people didn't want to have to look at anybody or talk to anybody. They just wanted to execute a trade at the lowest price possible. Now, they want advice, Place said. That may be, but Hevner expects the decline in online trading to continue until Wall Street turns positive again. Theres just so much uncertainty in the market, he said. People just dont know where to turn at this point.