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Little guys rush back into stock markets

INVESTMENT REPORTER

Surging stock markets have small investors partying like it's 1999 all over again, and nobody is celebrating more than Canada's discount brokers.

After several lean years, the discount-brokerage industry is enjoying near-record trading levels as investors pile back into stocks.

The trend is particularly pronounced now, with registered retirement savings plan season in full swing ahead of the March 1 contribution deadline, as investors snap up stocks, bonds, income trusts and other investments.

Mutual funds also are making a comeback, as reflected by the $1.8-billion Canadians poured into the sector last month.

With major stock markets coming off gains of 25 per cent last year, business at discount brokers rivals the hectic pace of the technology stock boom of 1999 and 2000.

That euphoric period eventually gave way to a nasty market slide.

At BMO InvestorLine, volume soared 82 per cent in January over the same month in 2003, while the number of new accounts rose 46 per cent, signalling that the rebound is being driven by existing customers and an influx of new ones.

"A lot of clients who had been less active . . . are starting to get back into the market," said Tom Flanagan, InvestorLine's president and chief operating officer. "We're hoping for a very robust year after having 2½ years of relatively slow trading volumes."

Just as during the tech bubble, trading activity often spikes when a high-profile company such as Canada's Research in Motion Ltd. -- which makes the popular BlackBerry wireless e-mail device -- announces earnings or other corporate developments.

"There's a lot more sensitivity to news," Mr. Flanagan said.

In a bid to meet the increased trading demand, InvestorLine has bulked up its customer-service staff by 10 per cent since November. Even with the additional staff, investors who place trades over the telephone complain of long delays, reflecting the high volume of calls.

About 85 per cent of InvestorLine's trades are placed through the Internet, up from about 55 per cent in 1999 and 2000.

The market's strong performance attracts novice investors, too.

Meles, a Toronto customer-service agent who did not want his last name used, had not bought a stock before last year, when he opened an account with TD Waterhouse Canada Inc. Since then, he tripled his $1,000 investment by buying and selling biotechnology and other stocks on-line. His best pick: Stelco Inc., which he scooped up for about $1 a share, then sold for more than $2 before the steel maker obtained bankruptcy protection in January.

"I started this as a hobby," he said. "I'm obsessed now."

Even day-trading, the speculative craze that reached its zenith during the tech bubble, is back in vogue -- though not to the same extent.

"My sense is, some people are coming back," said Bruce Johnston, a day-trader in Toronto. During the tech meltdown, "a lot of people got wiped out and lost everything."

Investors are trading more conservatively now, he said. "People are doing their homework more. The people I've talked to are a lot savvier. They are the survivors."

The rising stock market tide is lifting all boats in the on-line brokerage industry.

U.S.-based E*Trade Financial Corp. announced yesterday that retail trading volume surged 40 per cent in January from December. Bruce Seago, chief operating officer of E*Trade Canada Inc., said trading activity reached a three-year high in January, with volume roughly double that of the same month a year earlier.

"We're seeing a steady and sustained increase in activity throughout the industry," he said. "The retail investor is reinvigorated and investing intelligently again."

U.S.-based Charles Schwab Corp. said trading volume was up 62 per cent in January on a year-over-year basis. "As 2004 gets under way, we continue to see signs that investors are re-engaging with their financial affairs," chief executive officer David Pottruck said.

Mr. Pottruck added that more investors are buying stocks on margin -- putting down a portion of the purchase price and borrowing the rest from the broker. Increased margin activity often is a sign of an overheated market.

Indeed, tech shares -- including Nortel Networks Ltd., whose stunning collapse almost single-handedly dashed the retirement dreams of many Canadians -- were among the biggest winners in the market's most recent rally. "Those who forget history are doomed to repeat it," Mr. Johnston warned.

© 2007 The Globe and Mail. All rights reserved.

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