Day Trading for Dummies

A virtual cottage industry of day-trading training programs has sprung up, charging would-be millionaires up to $3,000 a week to learn how to take advantage of sudden swings in stock prices.

And although regulators say plunking down money on these courses can be about as risky as day trading itself, there's a growing audience. More than 4,000 people attended the recent Online Trading Expo in New York — an indication there are plenty of people yearning to become heart-palpitating momentum traders.

"Most of our people have one common denominator — they have a passion for stocks," says John O'Donnell, chief executive officer of OnlineTradingAcademy.com, one of the oldest day-trading training programs. Today, O'Donnell says, investors want to learn how to use so-called direct-access trading systems, which offer immediate access to the markets. "They are not just coming in and saying, 'I want to be a day trader.'"

Day-trading tutorials can range from three-hour workshops to intensive weeklong programs. Right now, more than a dozen firms are offering training courses to investors across the country. The longer sessions usually involve simulated rapid-fire trading on direct-access systems most big online brokerage firms still do not offer.

One of the oldest and most popular training programs is the $3,000 weeklong session offered by OnlineTradingAcademy. Since opening in 1997, the company claims to have "graduated" more than 1,200 people from its five-day tutorial and enrolled hundreds of others in more advanced training courses. The Irvine, Calif., company offers classes across the country and regularly refers its graduates to several of the biggest day-trading and direct-access brokerage firms, including Tradescape.com, CyberCorp and Momentum Securities.

The explosion in day-trading courses, however, comes at a time when securities regulators and lawmakers on Capitol Hill have focused anew on fast-paced stock trading. Last week, a Senate subcommittee that's been investigating the day-trading industry heard testimony from a number of investors who claimed they had been inadequately trained before being permitted to trade. At the same time, the subcommittee of the Senate's Governmental Affairs Committee released a report in which it concluded that most investors will lose money day trading. Senate investigators found that the average day trader must make an annual profit of at least $110,000 in order to break even after paying commissions.

The Securities & Exchange Commission and the National Association of Securities Dealers have also recently begun to crack down on day-trading firms. The two agencies sanctioned 10 day-trading outfits for violating margin-lending rules — regulations that govern how much money an investor can borrow to buy stocks.

With the wide variety of training programs, regulators fear many investors are throwing their money away on bogus classes with unqualified instructors. What's more, government officials say, these seminars don't sufficiently spell out day trading's risks. Some of the courses are offered by the day-trading firms themselves, the very places that have a vested interest in reeling in as many investors as they can. Industry leaders have discussed requiring a minimum standard for instructors, but so far no action has been taken.

"I think consumers have to be very cautious before they plunk down money to take one of these courses," says Bradley Skolnick, president of the North American Securities Administrators Association and Indiana's securities commissioner. "If they are such experts in the investment field, why are they offering these courses and seminars?"

The demand for those courses and seminars shows little sign of abating. While the Senate subcommittee estimates that the number of true day traders (investors who make dozens of trades each day) may number no more than 15,000, a growing legion of investors are becoming active traders — people who trade stocks a dozen or so times a week. It's the growth of that segment of the online trading population that's causing day-trading training programs to flourish.

In fact, there are so many firms offering day-trading training programs that some are resorting to outlandish marketing campaigns to draw attention. Massachusetts-based Velocity Trading, for instance, dubs its two-day, $995 training program "Day Trading Boot Camp." The company's Web site is replete with military references and features a picture of a drill sergeant yelling in a soldier's face. At the day-trading expo in New York, officials from Velocity came dressed in military fatigues. Velocity's president, Bob Carp, says the guns-and-ammo imagery is simply intended to drive home the message that day trading is a grueling occupation.

But is Carp worried that the military imagery might remind some investors of last summer's shooting rampage in suburban Atlanta, in which nine investors were killed by a disgruntled day trader? He says the thought never even crossed his mind. "We are advocates of discipline and strategy," says Carp. "The same thing you would find in a military campaign."

All together now: Yes, Sir!