Speculation is fashionable again in the stock market and regulators arebeginning to get worried, write Elizabeth Wine and John Labate.

Marlene Colean, a day trader who lives in Florida, was having a great run on the stock market - until a few months ago.

On a day when her biotechnology shares were tanking, she says her online broker's server crashed and then a lightning storm cut the power.

When she could trade again, Ms Colean held her position for a while, still hoping that the stock would go back up.

"The stock was in a free-fall and I reverted back to an amateur's way of trading. It was a lesson well learned, but it didn't take the fun or excitement out of it," she recalls. That day she lost $19,000.

The crash that began in 2000 was supposed to have had one silver lining - to purge the market of the naive novices who joined the equity bandwagon in the 1990s and sober up the more experienced traders who also got carried away during the boom years.

Yet speculation is back. Emboldened by the swift rally in share prices around the world since March, investors have come off the sidelines. Dotcom executives are back on the front covers of business magazines, Western investors are rediscovering their appetite for risky emerging markets and surveys are showing fund managers feeling more optimistic than they have been for years.

The regulators are beginning to worry. This week the National Association of Securities Dealers in the US issued a rare warning to investors about the danger of buying shares with borrowed money, known as "on-margin" trading.

Margin debt has surged by 25 per cent since January and is at its highest point since June 2001, reaching $174 billion in July.

The phenomenon is not confined to the US.

In Britain, , Barclays Stockbrokers reported a 50 per cent rise in retail trading volumes between March and August, and last week regulators at the Financial Services Authority warned of its concern that inexperienced investors are being drawn into speculative trading without understanding the risks.

"It seems to me to be a repeat of that 1999-2000 mentality," said Prof Andre Ratkai, a financial adviser and professor of finance at Denver University.

Investors have watched the Nasdaq soar by nearly 50 per cent and the blue-chip Dow climb 28.4 per cent since March. Even the most disciplined trader cannot help but feel the desire not to miss out on the start of what could be the next bull market.

Mr Woody Dorsey, a specialist in investor psychology at Market Semiotics, said the current environment is subtly different from 1999.

"1999 was a major mania. It was the end of a very long bull market, which is where excesses often occur. We're now either in the end of a bear-market rally or the start of the next leg of a bull market," he says.

Others say that investors' perception of the markets has undergone a fundamental change - rather than fearing loss, they now fear missed opportunity. So, just as they are increasingly willing to chase stocks in speculative sectors - such as biotech and semiconductors - they are also selling their holdings in more defensive sectors, such as drugs and consumer staples.

It is not just individual investors - who are generally seen as more susceptible to being chewed up by the markets - who are feeling the allure of easy gains. Traders say institutional investors are seeking to boost their performance in time for quarter- and year-end reports to investors.

Specialists in investor behaviour say the extreme reaction is typical of people who have lost a great deal of money, and see an opportunity to recoup their losses.

Mr Richard Geist, president of the Institute of Psychology and Investing, says investors have gone through a series of phases before arriving at the profit-hungry state they are in now.

Having got over their initial shock, they start to edge back into the market. "Next, people begin to get desperate to make up the losses because the losses have been so devastating, and the behaviour gets more aggressive," he says.

The problem with such aggressive behaviour is that it requires a proper appreciation of risk.

Good gamblers know when to step away from the table. But all the evidence suggests that ordinary investors typically come late to a rally, piling in when markets are already 30 per cent above their lows, and time their exits equally badly.

"They get back in the market just when it's due to pull back or consolidate the gains it's made over the last year," says Mr Geist.

"Then they start to panic when they face the correction. So they like to sell out over the ensuing couple of months of that correction - just at the wrong time again, because the correction will inevitably lead to the market having a second leg up." - (Financial Times Service)