The Stock Market
A main focus of this course is to understand how markets work and how prices are determined. An important market that impacts the overall economy is the stock market. Also, what happens in the macroeconomy impacts the stock market. You are asked to participate in this stock market contest so that:
you will have a better understanding of how to invest in the stock market and of the potential risks and rewards Studies show that if you start investing when young in a diversified portfolio (not all your eggs in one “basket” or stock) and invest over 30 – 40 years, the odds are that your money will grow significantly over that time period. For a brief music video lesson on the importance of diversification, listen to/view Guttermouth’s “Secure Horizons” (Links to an external site.)Links to an external site.
http://www.criticalcommons.org/Members/oroark/clips/securehorizons-update.mp4 Even though there are many ups and downs in the market in the short term, historically the market trends upward on average over time. (It is important, however, that you take on less risk as you get older and closer to retirement, in case there is a stock crash just before you retire.)
you gain a better understanding of how demand and supply factors can affect the price of stocks
To gain a better understanding of the stock market, corporations, and what it means to invest in stocks, please watch the following cartoon:
https://youtu.be/ul2AGTEwqgw Today, stock markets rely almost entirely on computerized matching of buyers and sellers to execute trades, but how a stock market operates remains essentially the same.
Stock Market Contest
Each member of the class will each receive $100,000 virtual dollars with which to invest. Your assignment is to spend $50,000 or more and purchase at least six stocks during the summer term. Your goal should be to invest wisely and try to make virtual profits by increasing the value of your stock portfolio.
By the end of the term, you can earn up to 100 points for your participation in this contest.
· 24 points for setting up your portfolio
· 36 points at the end of the term for your participation
· 40 points for your Investment Summary due at the end of the term
In addition, the top 5 performers in the stock market contest (who follow the rules and guidelines) will earn extra credit as follows:
#1 Stock Portfolio: 20 extra credit points
#2 Stock Portfolio: 15 extra credit points
#3 Stock Portfolio: 12 extra credit points
#4 Stock Portfolio: 10 extra credit points
#5 Stock Portfolio: 9 extra credit points
Your overall grade on this assignment does not depend on how well you perform in the stock market contest. You can finish last and still receive full credit on this assignment.
Your task is to participate in the stock contest by:
· purchasing and possessing six or more stocks throughout the term (you may buy & sell frequently and change your holdings if you wish)
· spending $50,000 or more (divide these funds up as you wish)
· submitting a written summary at the end of the term outlining your investment strategy, highlighting some of the companies in your portfolio, and indicating why you think you made/lost money on certain stocks
How to Buy and Sell Stocks on the Virtual Stock Exchange
When you are ready to buy stocks, you can search for a stock by entering a company name or its stock symbol on the search line shown.
To find a particular stock, the company must be publicly traded (not privately owned) and listed on a United States stock exchange. (If the company is owned by a parent company, you should look up the parent company. For example, if you wish to buy Taco Bell, you need to buy the parent company Yum Brands, Inc.) Type the corporate name (such as Tesla) or stock symbol on the search line and click the “TRADE” button next to the stock when it appears.
A pop-up window will appear and give you the option to “TRADE NOW” or go to the stock’s information page on the Market Watch website (click “FULL QUOTE PAGE”).
To process a trade click “TRADE NOW” and the trade window will appear. In the pop-up window, you will see information about the company, including the current or closing price for the stock, how much the stock price changed during the day, and the high and low price for the last year. (FYI: The stock market is open Monday – Friday from 6:30AM to 1PM PST.)
There are some options on the TRADING pop-up window. Unless you wish to initiate a more complicated trade, most of you will leave these on the default settings. The default Order Type is “BUY” (or “SELL” once you own a stock). The default Term is “GOOD TIL CANCELED”. The default Price Type is “MARKET”, meaning the current price (or morning price if the market is currently closed.)
You can choose the number of shares by clicking on the “SHARES” spectrum. In the lower right you will see an estimate of the price of the order. (An estimate, because prices change by the millisecond in the stock market.) Each trade you execute will result in a flat fee of $10 (per transaction, not per share).
Once you click “SUBMIT ORDER”, the trade will be submitted for execution. (If the market is closed for the day, the order be submitted when the market opens on the next trading day.)
Use price type “LIMIT” when you want to pre-program a buy or sell order at a specified price OR BETTER. (A minimum price or better for a buy order; a maximum price or better for a sell order.)
If you select price type “STOP”, once a stock price hits a particular price an order will be triggered (which could result in a transaction price that is higher or lower than the trigger price). This type of order is generally used when you own a stock already, and wish to limit your losses (or lock in a profit) if a market price changes significantly.
If you wish to read more about the difference between a limit order and a stop order, click here (Links to an external site.)Links to an external site. (http://www.investopedia.com/ask/answers/04/022704.asp) (Links to an external site.)Links to an external site..
Buying On The Margin
You may “buy on the margin” which means you can borrow up to 100% of the value of your portfolio. That means, initially, you can spend as much as $200,000 on stocks if you’d like. If you spend more than the value of your portfolio, you will be charged interest at a rate of 6% annually for any funds that you borrow. Cash Earns Interest
Any cash remaining in your account will earn 3% interest annually.
Most people choose to “Buy Low and Sell High” when it comes to stocks. However, you can make money when stock prices are falling by using the “SELL SHORT” option. If you think a stock price is too high and will decrease in price, you can “SELL SHORT”. Essentially, this means you borrow shares through the broker, sell them today at a high price, and then return borrowed shares to the broker by using the “BUY TO COVER” option when prices fall.
If you “SELL” at a high price and “BUY TO COVER” at a low price, you keep the difference and make money.
If prices rise, rather than fall, you will lose money on a short sale.
In addition to stocks, you may buy mutual funds. A mutual fund is an investment made up of a pool of funds from many investors for the purpose of investing in stocks, bonds and other assets. A professional manager determines assets to purchase with investor funds. It is a way for a small investor to buy ownership of many companies without having to make the investment decisions. Mutual funds are also assigned stock symbols.
Not available for purchase through the Virtual Stock exchange: put or call options, futures contracts, bonds, currencies, gold, oil, or other more complicated trades.
You may use any investment strategy except DAY TRADING (buying and selling the same stock in the same market day) if you want to be eligible for winning extra credit for finishing in the Top 5 Portfolios.
If you wish, you may buy stocks and simply hold them until the end of the term. This is known as a “Buy and Hold” strategy.
Or you may buy and sell many stocks with great frequency.
To Research, Or Not To Research: That Is The Question
You can conduct research through the Market Watch website or other sources of information to choose your stocks. Simply type the company name and click “FULL QUOTE PAGE” at the lower right of the popup window that appears. You will then be taken to the stock’s Market Watch page which includes news, price charts, analyst estimates and other potentially useful information.
A suggestion: choose stocks because you believe in the products and customer service of the underlying companies.