Day trading, where shares are bought and sold over the Internet at short notice, has become popular in the United States and is widely seen as a quick way of getting rich.

But Howard Davies, chairman of the Financial Services Authority, said 70% of day traders in the United States lost money and it was important that people were aware of the risks and understood the expenses needed to stand any chance of making a profit.

He said it was likely that day trading would grow in the UK as Internet share dealing systems became more popular.

"There is nothing illegal or unethical about day trading. But investors need to know what they are doing," he said.

Chat room risks

Mr Davies also warned of the risks posed by Internet chat rooms where online traders can exchange gossip and tips.

Howard Davies says beware chat room advice

He said investors should beware of expertise provided as advice could be unauthorised.

And he warned that tips offered in cyberspace could be examples of "share ramping" when the value of a share is talked-up artificially.

Mr Davies, who was speaking at a conference organised by the Association of Private Client Investment Managers and Stockbrokers, also raised a number of regulatory issues regarding Internet share trading in general.

He said firms offering day trading services needed to ensure their clients were credit-worthy and that their trading systems were not being used by criminals to launder illegal money.

He said the watchdog needed to ensure it did not "stand in the way of technological change" and should not bias regulation in favour of traditional paper-based trading.

Rapid growth

The volume of shares traded over the Internet is growing rapidly in the UK. Around 29,000 trades were carried out online in the first three months of the year. This figure jumped to 51,000 by the second quarter.

The growth is expected to accelerate as more stockbrokers offer such facilities.

In the US, 16% of all share trades are carried out over the Internet.

But one of the leading electronic share dealing services, E-trade, which has set up a UK subsidiary, denied that it would be promoting day trading in Britain.

A spokesman pointed out that the company did not provide day trading floors, or allow people to operate margin accounts, where they can borrow money from their stockbroker to buy shares.

"There are also fundamental differences between the nature of the markets here compared to the USA that make it unlikely that day trading will ever have the same impact. Stamp duty on every buy transaction is a major inhibitor. There also isn't the same volume or volatility in the UK market to make pure day trading attractive or feasible here," E-trade told BBC News Online.