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

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

FlexShares' Nimeri: Why is interest in ESG investing surging?

Sustainable and socially responsible have been familiar, but forgotten, investment sectors over the past 40 years. Why is that changing? Abdur Nimeri of FlexShares offers his perspective.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print