Four in 10 become customers after one version of simulated online trading

Reality bites funny-money investors

Feb 26, 2001 @ 12:01 am

By Rick Miller

If investors can make a bundle in the stock market playing with funny money, will they trade just as much using their own dough?

Companies such as E*Trade Group Inc. in Menlo Park, Calif., and Ameritrade Holding Corp. in Omaha, Neb., will be among the first to find out.

They're giving potential customers a pot full of funny money to test-drive a simulated version of their online trading sites.

And it's all done in the name of investor education - something the Securities and Exchange Commission has been pushing - although critics say it smacks of another slick marketing ploy.

In some cases, online simulations nab four out of 10 users as new clients, says an industry executive.

"There's a danger out there in the online world of leading people to think that everybody can do this," says Barbara Roper, director of investor protection for the Consumer Federation of America, a non-profit consumer advocacy group in Washington.

"The people I'm concerned about are the smaller, more typical investors. The vast majority don't belong in individual stocks. They're not investing enough money to be adequately diversified," she says.

Maybe so, but soon simulated investing will be a standard feature on top online brokerage websites, says Chris Chandler, chief executive of Simvest Solutions Inc., which provides the service for Ameritrade, the Toronto Stock Exchange and non-financial sites such as Juno and BellaOnline.

Charles Schwab Corp. in San Francisco may offer it on its wireless-trading platform, and New York-based TD Waterhouse Group Inc. has already used it internally to train employees, Mr. Chandler says.

Paying the consequences

Through the E*Trade Game and Ameritrade Investor Cup, investors get pretend money - $100,000 and $50,000, respectively - to experiment with going long, selling short, buying options and trading on margin.

While such sites can't break investors of all bad habits, Mr. Chandler says they come close.

Simvest's system flashes an error message if a portfolio is underdiversified, sends tips to discourage frequent trades and discloses mounting commissions.

The contest format motivates people to participate and see firsthand the consequences of their moves. "Simvest not only allows you to buy on margin, but you live with the consequences of margin," says Mr. Chandler.

"So, in a position of a margin call, we will actually make a margin call [through an e-mail]. If that individual does not cover it, we will sell their stock."

Buying on margin is one aspect of online trading that confuses investors, according to a recent SEC examination of online brokers.

The SEC said it has "received a significant number of investor complaints that appear to indicate a lack of knowledge about trading and investing."

Although many broker-dealers use online glossaries to explain key investment terms, they are often too complex for average investors to understand, the SEC reported.

"To help educate customers, broker-dealers should consider enhancing their websites to provide a basic explanation of securities trading. Firms should also provide conspicuous, plain-English disclosure about the risks of trading, systems outages and failures," the report said.

Lori Richards, director of the SEC's office of compliance inspections and examination, which authored the report, says text alone doesn't always get investor attention, so simulated investing could help.

"[If] people view it like a video game where it's all reward and no risk; that wouldn't be good. But if they can use it as a tool to genuinely see how online trading and investing in the market really works, that would be a real benefit," Ms. Richards says.

Since Ameritrade's Investment Cup started last summer, its website has received 400,000 hits; 80,000 visitors have participated in the contest. On average, people spend 50 minutes a month with the simulation, says Anne Nelson, Ameritrade's vice president of marketing and product development.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

Diversity & Inclusion Awards: 2018 nominations are open

Editor Fred Gabriel and special projects editor Liz Skinner discuss the nomination process for InvestmentNews' inaugural Diversity & Inclusion awards.

Latest news & opinion

Broker protocol: Indecision over recruiting agreement is rampant

Ruckus over recruiting agreement has even wirehouse lifers wondering if it's time

SEC Chairman Jay Clayton outlines goals for a new fiduciary standard

Rule should provide clarity on role of adviser, enhanced investor protection and regulatory coordination.

Advisers bemoan LPL's technology platform change

Those in a private LinkedIn chat room were sounding off about fears the independent broker-dealer will require a move to ClientWorks before it is fully ready.

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want their 2017 bonuses.

Maryland jumps into fiduciary fray with legislation requiring brokers to act in best interests of clients

Legislation requires brokers to act in the best interests of clients.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print