NEW YORK (CNNfn) - Maybe you're a modern capitalist maverick, or making your own raise, or wrestling the market's scrawny little body to the ground and making it beg for mercy.
But don't get caught up in the hype from online-brokerage ads. Sure, you'll feel "empowered" by trading with the click of a mouse. But you shouldn't change the reasons you trade, and too many do.
People who switch from phone-based stock trading trade more often, more speculatively and less profitably online, according to two finance professors at the University of California at Davis.
The report, which came out Sept. 10, looks at 1,607 investors who switched to trading online. It then compares how they did against 1,607 investors with similar-size accounts who didn't switch. Though the report is new, the data come from 1991 through 1996, and from an online brokerage that the professors agreed not to name.
Before switching, investors who went online saw "unusually strong performance," beating the market by more than 2 percent a year, according to the report. But they lost that edge after starting to trade online, lagging the market by more than 3 percent a year.
Why? They had too much faith in their own abilities, and that led them to make more bad trades, the professors found.
"We suspect that the online investing appeals to the overconfident, and fosters overconfidence," said Brad Barber, an associate professor of management, who compiled the paper, Online Investors: Do the Slow Die First?, with Terrance Odean, an assistant professor at UC-Davis. "If you increase your trading by going online, it's likely to cause your performance to erode."
The two have worked together before, on the 1998 report Trading is Hazardous to Your Wealth. That concluded discount-brokerage investors who trade frequently do worse than "buy and hold" investors. But this is their first report on online trading.
Online trading definitely has its advantages, particularly lower transaction costs, faster trades and easier access. And those are valid reasons for opening an online account, according to the professors.
"This is not a paper about whether online investing or phone-based investing is a better method of executing trades," Barber said. "It's clear an investor who doesn't increase their trading will benefit from the decreased transaction costs." But you only benefit if you don't change the way you trade to your detriment. Most do, he said.
Entertainment, cheap trades and the lure of feeling in control encourage trading to excess, the report finds. "Without equivocation, we can conclude that there is a dramatic erosion in the performance of online investors after they switch to online trading," it states.
The investors who opened online accounts already traded more often, averaging 70 percent turnover in their accounts each year. That compared with 50 percent for phone-based investors with similar accounts. But the turnover surged to 120 percent, annualized, in the investors' first month online. It then settled to a still-high 90 percent each of the next two years.
Speculative trades accounted for 60 percent of the increase. That rules out motives such as taxes or needing liquidity, Barber said. Lower transaction costs and greater ease of access make more trades potentially profitable. But in fact investors made more, worse decisions, the study found.
Ironically, the wealth of information at online investors' fingertips only made them poorer, the professors concluded. The people who switched had typically done well shortly before they went online, and that encouraged them to go it alone, the professors think. Coupled with extra information, investors overestimated the precision of their stock picking.
"People tend to attribute their own successes to their own abilities and their failures to others," Barber said. But their past luck or skill didn't help them. Instead, the investors were fueled by what he and Odean call the "the illusion of knowledge" and "the illusion of control."
"Your confidence goes up as you get a lot of information. But your accuracy doesn't," Barber said. Extra data hurts you if you misinterpret it, he said. "It's an enticement to trade because you feel like you have better information.
What people don't realize is that everybody else on the planet has access to this information. What you have to ask yourself is, do you have superior ability than everybody else in the world in evaluating this information?" Barber said.
Online brokerages such as Ameritrade and Discover Brokerage Direct declined comment or did not respond to requests for comment.
Others criticized the numbers as old. "We'd prefer to see something with more recent data," said a spokesman with Charles Schwab, the brokerage with the most online accounts. "It's an interesting topic. It points out the need for investor education." The technology might not have been developed for the "early adopters" in the study, he said.
Dennis Marino, chairman of National Discount Brokers, also thought investor performance might have improved. "From '96 through '99, you've gone through some pretty benign markets," he said. "I would suspect that if that [the study] were conducted between '96 and '98, clearly the findings would be somewhat different."
But Marino encouraged investors not to get carried away, and to recognize there are risks as well as rewards. "Investing is not a game," he said. His company aims to give investors the tools and information to trade responsibly, he added.
Not all investors use them well. "There is a tendency when the market is as active and volatile as it has been the last year or so for people to get caught up and not be as vigilant as they ought to be in managing their own wealth," Marino said.
Frank Petrilli, president and COO of TD Waterhouse Group, said investors move from 5 to 7 trades a year with an offline Waterhouse account to between 20 and 30 online.
But he did not believe they traded less successfully. "Those conclusions really fly in the face of what's happening in the marketplace," Petrilli said. People are increasingly comfortable holding stock, he said, and enjoy greater control and accessibility. "If people were not successful doing this, it would be hard to imagine the growth in the industry there's been," he said.
Having more information is "always better than having less information," Petrilli said, though he conceded "whether they [investors] misuse it, we haven't studied to the nth degree."
The study dates to the early days of online trading partly because the professors required years of numbers. But Barber said that was also the only data available. A number of online brokerages have declined to release more-recent information, Barber said.
Unless more people have opened accounts only for convenience without increasing their trading, the results still stand, he said. In fact, transaction costs have decreased, he pointed out, which may have encouraged even more trading.
David Schehr, senior research analyst at GartnerGroup Financial Services, said people who move online double their trading, from 1.7 trades a month to 3.4. He joked that online trading might be like learning to drive, where the first 12 months are the most hazardous.
Ken Clemmer, an online-brokerage analyst with Forrester Research, said there is scant data on the profitability of online trading. But it stands to reason that lower costs would encourage rasher trading. "If the ante is lower, then you're going to play hands you probably would not play," he said.
Online brokerages fuel increased trading with their ads, Barber said. "They emphasize the importance of frequent and speedy transactions. And many of these brokerage houses give a discount for volume trading," he said. But beware, he said. "Those who trade actively are of course the most profitable clients."