Complaints by online traders skyrocket
Complaints to the Securities and Exchange Commission by online investors have soared by 330%. The agency's advice: Do your homework.
February 1, 1999
by Kathleen Ohlson
(IDG) -- Some unwitting investors are learning a hard and expensive lesson when it comes to investments made online, sometimes paying more for their shares than they intended. As a result, some have complained to the Securities and Exchange Commission (SEC), which issued a warning to investors to make sure "that they have done their homework" before making any investments.
The SEC has received 330% more complaints in the past year concerning online investing, according to an official statement from the Washington-based agency. In 1997, there were 259 complaints about online trading. By last year, however, that number had rocketed to 1,114 complaints, the SEC said.
Most of the complaints have been due to trading delays and rapidly rising stock prices, and many can be resolved through "better education," said Arthur Levitt, chairman of the SEC.
Investors must know what they are buying and the ground rules under which they buy and sell stocks or bonds, and they must understand the risks they are taking, Levitt said in a statement. "Millions of new investors have taken advantage of the unprecedented access and individual control the Internet provides. But new opportunities present all of us with new responsibilities, challenges and risks."
The bottom line is that "investor protection -- at its most basic and effective level -- starts with the investor," he said.
Investors should have other alternatives to trading online in case they encounter any problems, Levitt added. Online brokerage accounts account for approximately 25% of all retail stock trades, and the SEC anticipates the number of online brokerage accounts to exceed 10 million by the end of this year. There are about 5 million currently.
Many online investors don't realize, for example, they can use so-called limit orders, which allows the buyer to dictate the amount they are willing to buy stock for, said Duncan King, an SEC spokesman. Instead, many online investors are doing "market" orders, in which they just order a stock and don't set any limits, King said. "They aren't educating themselves before plunging in," he added.
Another means of protection is a recent decision by the Nasdaq Stock Market to not allow individuals to trade on an initial public offering (IPO) until 15 minutes have passed. The hope is that by then, the stock will have gone through the biggest ups and downs and will have stabilized to a point where individuals cannot hurt themselves by plunging into the fray (see story).
One online brokerage firm concurred with Levitt's comments. "Chairman Levitt is advocating a responsible approach to investing," said Charles Schwab, chairman of Charles Schwab Corp. in San Francisco, in an official statement. "Whether you are investing via the Internet, over the telephone or in person, you need to understand your choices and risks before acting," he said.
Schwab has published a special guide to trading in these fast markets and issues a warning to potential traders that their access to certain volatile IPOs may be limited, Schwab said. The firm is asking customers to speak with representatives to place orders for these stocks instead of doing it themselves, Schwab added.
The SEC warning will "put public focus on the issue," said Jim Spellman, a spokesman for the Securities Industry Association in Washington. Some investors are trying to time the market to make a lot of money quickly and aren't looking at the long term, Spellman said.
There is a wealth of information about investing, Spellman added. "Before they invest the house, [investors] must educate" themselves, he said.
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