Online revolution opens new issue door to small investors

A REVOLUTION for private investors has begun with an initiative that puts individuals on an equal footing with institutions and market insiders for the first time in buying new share issues.

Charles Schwab, by far the largest online broker in the US, has started selling new share issues direct to its customers. Investors from New York to Peoria can now get in on the ground floor of share issues - which is often the most profitable place to be.

With more than four million online investors across America, this is potentially a vast market. And with much of the crazy valuations of Internet company shares driven by frenzied online traders, there is unquestionably an appetite for risk among the public. What Schwab has done is to turn itself into a kind of online investment bank to harness that potential. Last month it acted for the first time as a lead underwriter in the issue of four million shares by Select Comfort, a Minneapolis based air-mattress maker. Schwab selected 250,000 of its own 2.2 million customers and sent them a mail-shot touting the attractions of the issue. The response was so enthusiastic that Select Comfort says it was able to increase the size of the share offering. Schwab, meanwhile, is preparing a pipeline of further underwritings ready to take to its customers. It is not the first time that online traders have touted initial public offerings to the public. Wit Capital, for example, which calls itself the first online investment bank, sells IPOs to the clients of other broking firms. Until now, however, they have relied on being allocated shares by the underwriters, which meant that they rarely received as many as they wanted. Schwab, however, by becoming an underwriter itself, can control both the price and number of shares it gets to sell on to its customers. In future issues, Schwab plans to use the wealth of information it has on its customers to target the investors most likely to be interested in each issue. An age in which shares are sold like clothes or any other mail order goods appears to be dawning. Some estimate that by 2003, some 20 million investors will manage their portfolios online. Private investors' lack of access to IPOs has become a contentious issue in the US as the booming new issue market has produced massive profits for the Wall Street firms who manage them. Traditionally, the system permits individuals to buy shares only in the secondary market. With the most popular issues, private investors typically get to the shares only after the price has already soared into the stratosphere. As more people have started trading for themselves, their bitterness at being cut out of the potential profits on IPOs has grown. The sale of IPOs to individuals is likely to receive a boost once Merrill Lynch, the world's biggest broker in terms of customers, launches its online trading in the next three months. CHARLES Schwab reported last night that online trading was largely responsible for its startling rise in fourth-quarter profits last year to $106.4 million (GBP 64 million) from $63.1 million a year ago. Although the broking fee for online trades is substantially smaller than for "broker-assisted" trades, revenues were still sharply up because online trading soared 41% over the quarter. Brits will get their chance - eventually WHAT is the prospect of British private investors getting first bite of new share issues? Schwab is expanding fast here and, theoretically, there is no reason why investors should not be able to buy American IPOs that come on offer. The problem is that British investors may know little about companies such as Select Comfort and avoid them as being too risky. It is likely to be some time, however, before Schwab gets round to participating in British share underwritings. It is new to our financial markets, Internet use here is considerably smaller than in the US, and so too is private investor involvement in the stock market.

Copyright 1999
Provided by ProQuest Information and Learning Company. All rights Reserved.