Ignoring the company behind the stock


Daytraders perpetuate a worrisome trend in financial markets: the habit of concentrating more on short-term fluctuations in stock prices than on the performance and value of the companies behind them. Admittedly, this is hardly a new phenomenon; in the late 1980s large investor corporations were already shifting their focus to quick-money strategies. Louis Lowenstein, interviewed for the book Crash (Arbel & Kaff, 3-4) noted that:

Shares are bought and sold for overnight trading profits rather than as carefully considered investments in the future of corporate America and its people. . . (O)nly about 14 percent of the outstanding stocks listed on the New York Exchange were bought or sold in 1960. In those earlier years, most investors held on to their shares, casting a vote of confidence in the corporations that issued them -- But in 1987, about 84 percent of stocks changed hands within one year. The big boys are trading securities as if they were baseball cards.

In 1999, current technology makes it possible to trade second-to-second instead of overnight, and one no longer has to be a "big boy" to do so. An article in The Washington Post quotes daytrader Earl Van Alstyne: "'Wall Street's not about investments anymore, it's about numbers... Who cares whether it's a car company or a chemical company? Who cares what they're going to be doing in 2000?'"

This disregard for the actual company involved in trades highlights a number of issues. First and foremost is an exacerbation of the point made by Arbel and Kaff. The increased emphasis on the short term, induced by the daytrader phenomenon, can have dramatic effects on any company's value; however, these effects seldom reflect the actual worth or performance of the company. Daytraders often prefer to trade in Internet and high-tech company stocks, contributing to the perceived over-valuation of those companies. An article in Forbes suggested that the current hype over Amazon.com and Yahoo!, and similar hype when Netscape went public a few years ago, are partly due to the actions of daytraders.