NEW YORK -- Brokerages are making it tougher for individuals to use borrowed money to invest in volatile Internet stocks, a reaction to huge price swings in shares of tiny companies that are nowhere near making a profit.
Salomon Smith Barney imposed new restrictions on shares of 18 different companies, a source who demanded anonymity said Tuesday.DLJ Direct, an Internet brokerage run by Donaldson, Lufkin and Jenrette, also slapped new curbs on so-called margin investing, the New York Times reported on Tuesday.
The moves come amid a trading frenzy that has seen market darlings such as America Online and Yahoo! double since early October, while shares of virtual unknowns have doubled and tripled in just a day with little more than an announcement of a new Web site.
While the market's sharp downturn on Monday sent many of those high-flyers plunging more than 30 percent, the search for Internet gold resumed on Tuesday as speculators pumped up seemingly any company with something "cyber" to say.
It was the risk of an extended selloff among Internet-related stocks that likely prompted Salomon Smith Barney to increase the amount of collateral required for clients who borrow money to buy stock in that sector.
Since those who borrow money to invest -- a practice called "buying on margin" -- agree to use their stock as collateral for the loan, a sharp drop in share value could force a brokerage to request more cash as collateral. If an investor cannot meet that "margin call," the brokerage can sell a client's stock to prevent a loss on the money lent.
If a stock falls too quickly, as often happens with hot stocks that lose their momentum, the stock may have to be sold at a significant loss for the client or even the brokerage.
"When it goes down, things can get nasty, and that's why these brokerages are doing this," said Barry Hyman, senior equity analyst at Ehrenkrantz King Nussbaum. While it's common for Wall Street firms to limit risk by changing margin restrictions, he added, "that usually happens in individual stocks, not in an individual sector."
Most brokerages allow investors who want to buy a stock for the first time to borrow a dollar for every dollar they put up in cash, thereby allowing them to double the amount of stock they can buy. And while there are formulas allowing for normal price fluctuations, the total value of a portfolio can only go so low before a margin call is issued.
It was this restriction the two brokerages have raised.
Singling out both upstarts and industry leaders, Salomon Smith Barney tightened restrictions on holders of Yahoo!, America Online, Amazon.com, eBay, EarthLink, theglobe.com, Books-A-Million, K-tel International, Egghead.com, CDNow, Onsale, CyberCash, CyberShop, eBay, Audi Book Club, Navarre, EarthWeb, BroadVision, and 24/7 Media.
Even so, the infatuation with everything Internet created new shooting stars on Tuesday.
Take Platinum Entertainment, for example. The music retailer reported that visitors to its Web site rose from 13,500 in October, the first month of operation, to 1.5 million in November. There was no mention of how CD sales are going, but the stock had nearly doubled at the day's high before pulling back to a gain of 38 percent.
Meanwhile, many of last week's greatest hits seem spent on Tuesday, their momentum broken by Monday's bruising selloff.
Books-A-Million, a Web book retailer, saw its shares jump last week from about $4 to nearly $40. They fell to $24.50 by Tuesday's close.
Fortunately, some companies have other business on which to fall back. Unlike many other "e-tailers," Books-A-Million has 172 real book stores.