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Last Updated: Friday, 29 August, 2003, 08:31 GMT 09:31 UK
The return of the small investor
By Myles Neligan
BBC News Online business reporter

The amateur investor - that archetypal figure of the late 1990s boom who supposedly made fortunes from the comfort of his living room by buying and selling shares online - is back.

Earlier this month, research firm ComPeer reported that online trading rose by 42% in the April to June quarter, in a sign that some of the private investors who got their fingers burnt when the boom turned to bust may returning to the market.

Financial pages
Small investors are scanning the markets once more
There's some dispute about whether the increase reflects a genuine comeback by private investors, with brokers pointing out that online trading activity can be highly erratic.

But the recent surge in UK stock prices - the benchmark FTSE 100 share index has risen by a quarter since mid-March - would be enough to make even the most battle-scarred amateur trader think about getting back into the fray.

Beginner's luck can be the surest way to make a private investor very poor, very quickly
Alpesh Patel
Private investor
Becoming an amateur trader is easy and cheap, with total outlay limited to a few hundred pounds.

All you need is internet access, a subscription to an online share price service, and an account with a broker who will execute your trades for you.

Pitfalls

But if you fancy yourself as an armchair Gordon Gekko, beware. Successful private investors warn that trading profitably requires skill and hard work.

Alpesh Patel, a private investor and stock market pundit who has been trading full time since walking away from a career as a barrister seven years ago, is keen to dispel the notion that there's easy money to be made by dabbling in shares.

Mr Patel reckons that up to 80% of private investors lose money, while the remaining 20% achieve their gains only by immersing themselves completely in the lore of the market, and trading actively.

He argues that anyone thinking of becoming a private investor should first consider whether it is truly worth their while.

Alpesh Patel
Alpesh Patel: Always on the lookout for valuable stocks
Many novice traders whose initial transactions turn a profit find that they could have made more money more quickly by doing a regular job.

And Mr Patel stresses that those who set out to make a living from trading have no choice but to acquire the traditional analytical skills needed to judge whether a share is worth buying or not.

Unfortunately for those with no background in the markets, this will involve ploughing through intimidatingly complex text books.

"It's not an easy way out of the day job. If you don't understand company valuations, and concepts such as PE (price-earnings ratio), then you don't know enough to do it." he says.

"You might get lucky, but beginner's luck can be the surest way to make a private investor very poor very quickly."

Amateur hour

The next step for the fledgling stock picker is to adopt the ruthless mindset of the professionals.

This involves developing a clear strategy which will determine what type of stocks to buy, and at what point they should be sold, both on the way up and on the way down.

According to Mr Patel, the most common error of the novice trader is to re-rationalise an investment as a long-term purchase when the stock falls below the price floor he has set, instead of selling it immediately.

Successful traders don't trade as much as you might think... they wait for good opportunities
Alpesh Patel
One reason why amateur investors are prone to this mistake is that once a stock has fallen below the purchase price, selling it will generate a loss.

Holding onto it, however, means the loss remains theoretical, and keeps open the possibility of making a profit in the event of a future rally.

For Mr Patel, this is dangerous self-delusion tinged with an Enron-style approach to accounting.

"You should sell a falling stock. If you really think it's a good long-term buy, ask yourself this: why are you not buying it any more?"

Mr Patel also cautions against the complacency that can set in at times such as the present, when a steadily rising market can mask a mediocre trading performance.

The acid test of trading skill, he says, is to make returns in excess of the market's, when share prices are rising, and to carry on making money even when they are falling.

With brokers now offering derivative products that allow private traders to "short" stocks - selling borrowed shares in anticipation that their price will fall, and then buying them back more cheaply - beating a falling market is now easier than ever for those with the right combination of nerve and skill.

Upside, downside

Finally, Mr Patel recommends a quality over quantity approach to trading, advising that investors take the time to pore over share price data and company announcements in pursuit of stocks with good "upside potential".

"Successful traders don't trade as much as you might think. Rather, they wait for good opportunities."

Mr Patel himself only keeps four or five positions open at any one time, and usually aims to sell within a maximum of about two weeks.

Mr Patel has good and bad news for those still contemplating a foray into the stock market. The bad news is that he believes the recent share price rally may run out of steam next month as institutional investors decide to cash in their gains.

"I'm a bit concerned. When the big boys come back from holiday at the beginning of September, they may see the FTSE above 4,200 and say 'I fancy selling into that'," he says.

But the good news is that becoming a trader will provide valuable insights into an activity that is routinely overlooked despite its critical importance to the country's economic health, not to mention our own savings.

"Investing should be taught in schools," he says.

"In this country, there's a lot of snootiness about share trading. But then you're obliged to give part of your income for the rest of your life to a pension fund manager who will probably lose a large proportion of it, and you won't understand why."


SEE ALSO:
Online share trading 'surges'
11 Aug 03  |  Business
Barclays buys US online broker
31 Jan 03  |  Business
Turmoil turns investors off shares
01 Aug 02  |  Business
Hard times for online share dealers
02 Mar 01  |  Business
Online share trading wilts
12 Jan 01  |  Business


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