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December 25, 1998: 9:14 a.m. ET
While others bemoan the volatility of Internet stocks, day traders thrive on it
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NEW YORK (CNNfn) - Tracking the price fluctuations of many Internet stocks is enough to make even the most casual observers scratch their heads. For day traders, however, the wild ride is reason to smile.
Analysts say individual, rather than institutional, investors are responsible for the movements of most of the high-flying Internet stocks. That the word profit has yet to become associated with many Internet companies is of no concern to a day trader. They often don't even bother with finding out what a company does in order to make money trading the stock.
While analysts agonize over Internet stocks' high valuations without the supporting fundamentals, day traders seldom concern themselves with such niceties as price-earnings ratio and capital spending.
Amazon.com Inc. (AMZN) surges $50 one day then gives back $30 the next? No problem. For day traders, there's no such thing as a stock that's too volatile.
Trendy dealings
"This is where you get returns on your investment of 400 to 500 percent a year," said James Laurent, partner at Great Neck, N.Y.-based Andover Brokerage.
If a traditional trader's relationship with a stock can be described as a love affair, day traders seldom stick around long enough for it to be considered a one-night stand.
The typical institutional trader spends much of the time sifting through financial statements and agonizing over a company's long-term outlook. Day traders - as their name suggests - trade for the moment.
About the only thing day traders look at is a company's stock chart, and Internet stocks offer some of the most intriguing charts around. If the line is moving up, it's time to move in. When it starts to move the other way, it's time to bail out.
"Day traders are the least sophisticated of investors," said Gregory Hold, chief executive of On-Line Investment Services Inc., a Jersey City, N.J.-based day trading firm. "To them, they're just playing a video game."
But it's a game in which some people make ridiculous amounts of money in one day. One legendary day trader made $4 million in November, including $1 million in a day.
Laurent said one trader at his firm made $475,000 one day in late November when online auctioneer OnSale Inc. (ONSL) suddenly surged to nearly 100. Not surprisingly, that stock has since tumbled back down to the $30-a-share range.
Who's responsible?
But that kind of volatility has the Nasdaq Stock Market and several brokerages up in arms, especially when it comes to initial public offerings.
In the past month, three Internet companies posted gains of more than 200 percent on their first day of trading. One of those companies, theglobe.com inc. (TGLO), soared 606 percent, making it the most successful IPO in history. All three of those issues tumbled sharply in their second day of trade.
Nasdaq wants to propose new rules to control some of that volatility. Though it's clear individual investors are the prime movers of many of these stocks, day traders are quick to say they're not to blame.
For one, day traders are held to 200-share blocks of IPOs through Nasdaq's Small Order Execution System (SOES). And generally speaking, Hold said, day traders move stocks in 1,000-share blocks.
"The notion that day traders change the valuation of a company or a group of companies is ludicrous," Hold said. "If you accept the fact that day traders have the power to do that by staying on one side of the market, they always move to the other side within the day. If they're moving it up, you have to reason they're moving it down, as well."
Or, as Lee succinctly put it: "We are drawn to volatility, we don't cause it."
Only the strong survive
Though day trading Internet stocks can be profitable, it's not for the thin-skinned, nor is it for the average consumer who moves stocks through an online broker like E*Trade (EGRP) or DLJdirect.
"Unless you have a background in trading stocks, you can't compete," Lee warned.
Hold said On-Line Investment recently imposed restrictions on newer day traders' buying power and share volume.
"Sometimes," Hold said, "they don't know when to quit for their own good."
-- by staff writer John Frederick Moore
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