Sometime last year three entrepreneurs approached the financial institutions in London with a bright idea. Their idea involved an Internet share dealing system.

The institutions were impressed. The three were able to raise £2.4 million, partly by means of a quote on the Alternative Investment Market. Each of the three received 10 per cent of the company. At that stage, all they had contributed was their idea. They had no cash because they were still repaying student loans.

A year later the company has still not actually done anything. It has not traded in any significant way and profits still seem to be a distant dream. The three originators are hard at work, however, and the company could well be a substantial success.

The company is now worth £34 million. The shares, launched at 6p are now 36p. Each of the founders could presumably sell out tomorrow and walk away with £3.4 million.

Why is the company "worth" £34 million? Because private investors have been piling in like teenagers chasing a pop idol. No one knows what the company's product will actually be. Having told the institutions about the original idea, the inventors have kept everything secret. The institutions, who know all about it, put its value at £2.4 million. Members of the public, who know nothing about it, have given the company a value of £34 million.

Only last week a friend urged me to invest in this company. "They are bound to rise," he said. "Well, if they are bound to rise, who is selling any?" I asked. "That's the point," he said "no one is selling so the shares are going up like a rocket." "So who did you buy your shares from?" I asked.

If ever there was a market due to explode it is this consumer boom in Internet shares. The buyers do not understand the mechanics of the market. They have no real knowledge of the companies whose shares they are buying. The astonishing values now being placed on these companies are related solely to the prospect that they might rise further; they bear no relation to the real commercial prospects for the companies themselves.

Undoubtedly, a few of these internet stocks will prove to be real winners. But they will be a minority. Many will disappear. Others will stagger on, earning a comfortable living for their founders but disappointing their investors who plunged in during the unsustainable boom of late 1999.

It really is amazing that sensible people who would never dream of gambling £1,000 on a horse in the Grand National are cheerfully prepared to "invest" far bigger sums in companies with no racing history, no impressive parentage and no known jockeys.

Converted for the new archive on 30 June 2000. Some images and formatting may have been lost in the conversion.