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Thursday, 25th April 2024 |
| Everyone's into investing these days, Eoin Fahy investigates the extent and impact of this |
The excellent returns being achieved by institutional investors, as evidenced by the survey results, are of course attracting considerable interest, not only in Ireland but also in other 'western' countries. In the US, in particular, tens of thousands of individual investors have been so attracted by the returns on the investment markets that they have begun to engage in 'daytrading'.
Daytrading is the practice, so far largely confined to the US, where individual investors buy shares with a view to making a rapid profit. Nothing unusual in that at first sight - all investments are, at the end of the day, about making profits. But what is unusual is that these investors are buying and selling the same shares on the same day. They may buy shares in the early morning, then sell them before lunch - hopefully at a profit - then repeat the process later that afternoon. If all goes according to plan, they never actually have to pay for their investments, but simply receive the profit from the transactions.
Day traders fall into two distinct groups. There are those who research companies and understand their fundamentals and trade with the expectation of beating the market experts at their own game. The other group hardly know what business a company is in, but trade its shares on the basis of the price movement of the stock.
Most day traders are full-time traders, sitting at home for eight hours at a time in front of their PCs. Now the New York Stock Exchange is considering extending its opening hours to a 19 hour day in order to accommodate daytraders who wish to deal in the evening. In another important recent development, Wall Street firm Merrill Lynch has finally submitted to one of the biggest revolutions to hit the US stock market since May 1 1975, when fixed brokerage commissions were abolished. It confirmed last week that it is about to offer discounted online trading to its existing customers. Chief Executive David Komansky acknowledged that " there is a segment of the market that wants to transact business over the Internet". Bloomberg estimates that online investors, including day traders, now account for approximately 440,000 trades daily or about one in seven US stock transactions.
The worry among regulators is that these individuals could lose their life savings and potentially destabilize the market. While daytraders provide welcome liquidity to the market, it is unclear how they would react in the event of a sustained correction in shares. Most of these investors only have a history of investing through this bull market and the fear is that they will exit the market en masse when it ends. The other worry is that online traders are gambling huge sums in the market and in the event of a severe downturn may not be able to honour their commitments.
But while there are indeed worries about daytraders, and their possible reaction to any downturn in markets, we should not necessarily be wary of a trend that increases share ownership in the world's largest economy. Some would argue that the strong productivity trend in the US is in part due to the fact that share ownership is far more widespread now than in the past, meaning that managements of companies are more driven by the need to increase shareholder value than they would have been a decade or two ago.
Here in Ireland, of course, direct daytrading via the Internet is not (yet?) possible. The stock exchange trading system does not allow for direct transactions of deals online, although NCB Stockbrokers allow customers to input their orders via the Internet to be processed later. But with the pace of technological change quickening all the time in all walks of life, can it be long before we see online trading in Ireland?
Whatever the merits, daytrading is now becoming a major factor on the investment markets. Watch this space! |
Eoin Fahy is senior economist with Ulster Bank Investment Managers
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| Article appeared in the June 1999 issue.
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