The SEC released some information last week that was akin to the Surgeon Generals warning on tobacco products. 90% of people who invest on their own eventually lose money. That statistic alone is enough to make the “Blair Witch Project” look like a situation comedy. However in the face of a statistic that could be compared to a stacked deck, the online/discount firms aggressive advertising campaigns continue to air at a blistering pace.
E-Trade, a popular online trading vehicle just announced that they would be offering a $4.95 commission rate available to their customers. At $4.95 a trade and trading being their only source of revenue, how do they pay for all those cute advertising spots?
They do it by enticing their customers to conduct many trades. One way they do this is by offering incentives to customers who trade a lot.
For example, if you make 30 trades a quarter you receive…
“Priority customer service line and e-mail; dedicated trading page, research from BancBoston Robertson Stephens, live discussion groups, continuous updates on account balances.” 75 trades a quarter you receive… “All of the above plus priority access to IPO’s, streaming Level II Nasdaq quotes, Bridge services (including streaming quotes, market analysis and reports and Watch lists).
Philip Morris, the tobacco giant that is the maker of popular Marlboro cigarettes offers really neat gifts and prizes for people who smoke a lot. Irresponsible tavern owners offer drink specials that lead to drunkenness. Anyone see the similarities? Investors around the country have and are starting to learn their lesson. The volume of the online trades executed is on a sharp decline along with the price of their stock. Major firms like Goldman Sachs or Pershing derive their revenues from many different wells. The online firms derive their revenue from one well that is starting to go dry.
It is important when conducting business of any sort to understand the motivation of the entity one is doing business with. The motivation of the discount world is transaction based. That theory is not for the prudent investor or in the best interest of any portfolio. There are no shortcuts in life, and this cliché is applicable to personal finance. The online/discount investing companies through irresponsible marketing and greed-based intent has turned wealth building into a virtual casino. The true repercussions of the events of today are beginning to be felt, and will result in empty savings accounts and a myriad of lawsuits.
Do You Have a Trading Problem?
1. Is trading the most exciting activity in your life?
2. Do you lose time from work due to trading?
3. Do you spend most of your free time trading or daydreaming about trading?
4. Do you lie to your friends or family about how much you trade?
5. Have references to trading increased in your conversation?
6. Do you trade to escape worry or trouble?
7. Have you felt “no good”, guilty or depressed because you lost money trading?
8. Have family or friends said they notice a change in your behavior or personality, such as irritability, impatience or sarcasm? 9. Have you borrowed money or used money that was given to you for another purpose and used it to trade?
10. When you lose money trading, do you want to return to trading to win the money back?
11. Do you feel that making a big trade will solve your problems?
12. Have you had difficulty trying to stop trading?
13. Have you had self-destructive thoughts because of your problem relating to trading?