The Stock Market Game Program A classroom activity for students grades 4 - 12

Stock Market Game Basics

SMG Basics Real-time stock market simulation Played on the internet from any computer The game runs for ten weeks in the fall, spring, and late spring. A new whole year game is also available.

Transactions are made at the SMG WorldWide site at: www.smgww.org SMG Rules Transactions are made at the SMG WorldWide site at: www.smgww.org Trades are processed in 5 – 20 minutes

Each team begins with a hypothetical $100,000 SMG Basics Each team begins with a hypothetical $100,000 Teams should have one to five players

SMG Basics Teams may buy, sell, short sell, or short cover their stocks Invest in common stocks, mutual funds and ETFs traded on the three major exchanges: American, New York, and NASDAQ Stock Exchanges

SMG Basics A 2% brokers fee is charged for each buy or sell – limits day trading issue Stocks valued at less than $5.00 per share may not be bought Teams may borrow up to $100,000 to purchase stocks on margin -- interest is charged

Portfolios are updated and available on a daily basis SMG Rules Stock and cash dividends and splits are automatically computed into team portfolios Portfolios are updated and available on a daily basis Rankings are updated every weekend Teams will not appear in the rankings until a trade is made

2% annual rate of interest is earned on cash balance SMG Rules 2% annual rate of interest is earned on cash balance 7% annual rate of interest is paid on negative cash balances (borrowed money)

Trades are made based on prices at time of order (market order). Trades entered after 4:00 p.m. will are made at the next day’s opening price. You may trade only stocks and mutual funds that have traded within the last 7 days.

SMG Basics Portfolios are not liquidated at the end of the game and should not be liquidated at the end of the game The team with the highest portfolio equity at the end of the game wins Portfolio equity in the tenth week is used for final rankings

How Does the Competition Work?

Teams compete within a geographic region and on six levels

Grades 4-6 Grades 7-8 Grades 9-12 Post-Secondary Youth Groups Adult SMG Levels Grades 4-6 Grades 7-8 Grades 9-12 Post-Secondary Youth Groups Adult

General Information

Buying: Ticker symbols are available online General Information Buying: Ticker symbols are available online Must be for a minimum of 100 shares May set a maximum purchase price limit Called a “Long” position

Buying: Must have closing price of at least $5.00 per share General Information Buying: Must have closing price of at least $5.00 per share No “penny” stocks Most brokers will not allow margin purchases of stocks below $5.00

Selling: Must already own the stock General Information Selling: Must already own the stock Must be for a minimum of 100 shares (unless selling the only remaining shares) ex: If you bought 120 shares, then sold 100, you may then sell the remaining 20. May set a minimum selling price limit

Setting a “limit” price A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. you want to buy stock ABC, which is trading at $12, you can set a limit order for $12.50. This guarantees that you will pay no more than $12.50 to buy this stock. you own stock ABC and it is trading at $15, you could place a limit order to sell it at $14.50. This guarantees that the stock will be sold at a price greater than or equal to $14.50 but not below. Best for overnight or weekend trades. The limit trade is executed only once.

General Information Please Note: For real time trading price limits are generally not needed except for trades entered after the market close.

General Information Short Selling: Short selling starts with borrowing a stock from your broker You sell the borrowed stock hoping to buy it back at a lower price and return (short cover) it to your broker for a profit All rules for buying still apply

Short Covering: Must have already short sold the stock General Information Short Covering: Must have already short sold the stock May set a maximum price limit All other rules for selling apply

Example: Short Selling and Covering General Information Example: Short Selling and Covering I feel that IBM stock is going to go down and want to short sell the stock. I am borrowing the stock from the broker (2% brokerage fee) and selling it. Now I’ve got cash.

Example: Short Selling and Covering General Information Example: Short Selling and Covering When stock price is at its lowest, I short cover by buying the stock back in the stock exchange at the low price and returning it to the broker (2% brokerage fee). I keep what I didn’t spend. I get the difference between the high price and the low price minus the brokerage fees.

A Long Position is a stock you own. General Information Long Positions: A Long Position is a stock you own. Ex: If a team owns 100 shares of McDonalds, their long position is 100 shares. = Value of Long Position # of shares X current price per share

A Short Position is a stock you borrowed from the broker and sold General Information Short Positions: A Short Position is a stock you borrowed from the broker and sold # of shares X current price per share = Value of Short Position

= Equity Equity: + Cash Balance General Information Equity: Total Value of Long and Short Positions + Cash Balance = Equity

General Information Buying on Margin: You may borrow funds using the stock in your portfolio as collateral for the loan Interest charged at 7%

Borrowing on Margin At the beginning of the game, teams have $200,000 of purchasing power, 50% of which is collateralized by your initial cash portfolio of $100,000 50% of value of long and short position is required as collateral (margin requirement) Initial Margin Requirement = 50% Margin requirement is subtracted from Equity Remainder is matched dollar for dollar for total buying power

Margin Call: If the Total Equity in your portfolio falls below 30% of the value of your long + short positions, your team will receive a “margin call”. SMG will automatically liquidate a portfolio that falls below the 30% rule until the minimum margin requirement of 30% is met. 31

Investment Basics

Different Types of Investments: Investment Basics Different Types of Investments: Insured Savings Accounts Savings Bonds Certificates of Deposit Treasury Bonds Corporate Bonds Mutual Funds Stocks ETFs Collectibles Commodities

The RISKIER the Investment - The HIGHER the Return Investment Basics The RISK to RETURN Relationship: The RISKIER the Investment - The HIGHER the Return

Investment Basics The Difference Between Stocks, Bonds, and Mutual Funds Stocks: You own a piece of the company You make money if the company does well Bonds: You loan money to a corporation or government You earn the interest Mutual Funds & ETFs: You own one portion of a collection of stocks, bonds, or other securities

Investment Basics The Three Main Markets: NYSE: New York Stock Exchange Oldest, largest, best-known stocks NASDAQ: (National Association of Securities Dealers Automated Quotations) Large, mid-sized, and small growth companies AMEX: American Stock Exchange Mid-sized growth companies

The Difference Between Large and Small Companies: Investment Basics The Difference Between Large and Small Companies: Large: Often have high prices Low risk of failure Some pay regular dividends Small: Potential for growth is greater Generally prices are lower

Pay dividends based on performance of the company Investment Basics Common Stocks: Pay dividends based on performance of the company Have higher risk but may have higher reward Preferred Stocks: Dividend amount is preset Dividends are paid on preferred stocks before common stocks Have lower risk but may limit reward

Over-The-Counter Stocks A security which is not traded on an exchange, usually due to an inability to meet listing requirements. For such securities, brokers/dealers negotiate directly with one another over computer networks and by phone. The NASD carefully monitors their activities. Be very wary of some OTC stocks, the OTC:BB (Bulletin Board) stocks are either penny stocks or may hold bad credit records.

More shares are created at a lower price per share Investment Basics Stock Splits: More shares are created at a lower price per share Stockholders profit if stocks go up Indicated with an (s) in the paper Ex: Dell $109  $54

Mutual funds Closed-ended funds may be traded just like the stocks traded on the NYSE, NASDAQ and American Stock Exchanges. Open-ended mutual funds can also be traded but cannot be short sold or short covered.

Blue Chips the largest and most profitable stocks Investment Basics Other Terminology: Blue Chips the largest and most profitable stocks Bull Market a market that is rising Bear Market a market that is falling

Why long term investing is the best route? Investment Basics Why long term investing is the best route?

Investment Basics DJIA over last 33+ years:

What stocks should I buy? Investment Basics What stocks should I buy? PE Ratio Price-to-earnings ratio. Earnings = earnings per share or firm profit divided by number of shares. More earnings per share given stock price results in a lower PE ratio and a better buy. Find PE ratios in the newspaper.

Where to get more information American Stock Exchange- www.amex.com NASDAQ- www.nasdaq.com NYSE- www.nyse.com CNNfn- www.cnnfn.com CNBC- www.cnbc.com EDGAR Database of Corporate Information- www.sec.gov/edgarhp.htm Yahoo! Finance- http://finance.yahoo.com Google Finance - http://finance.google.com/finance

Playing the Stock Market Game Online Demo

Inside SMG WORLDWIDE (Team Pages) Inside SMG WORLDWIDE (Teams) Remember: IDs and passwords are case sensitive and must be entered as they appear on the email you received from your coordinator. Remember: Log Off by clicking the icon at the upper right-hand corner of the page to protect your portfolio. Teams login to their Team Portfolio The blue Trading tab contains all the functions necessary to compile research and make trades. The green Market Mysteries tab takes participants to an interactive role-playing game where they become “market detectives” asked to solve “market mysteries.” Click the SMG WORLDWIDE Globe on the upper left-hand side of the page to return to the SMG WORLDWIDE homepage. Teams will not appear in rankings until the week after their first trade. The blue Trading tab contains all the functions necessary to compile research and make trades. 48

This team has used some of its “margin” Account Summary This team has used some of its “margin” Account Summary and Transaction Notes There are 9 functions for portfolio management available through links on the blue portfolio tab. Account Summary is a summary of the equity in the portfolio. Account Holdings is a list of all open positions in a portfolio. Transaction History is a list of all trades that were accepted by the system. Gains & Losses is a list of all realized gains or losses from the sale or short cover of stocks. Investor Research is a link to a site where teams may research stocks and companies. Enter a Trade is what you click to either buy or sell a stock and/or short sell or short cover a position. Pending Transactions consist of all trades that have not yet been entered into the system. Transaction Notes include a list of all trades that were attempted, whether or not they were executed. Americas Indices is a list of several major indices. Click on Account Summary for a “snapshot” of your current financial status. Transaction Notes is the first place you should look whenever you suspect your Account Summary is inaccurate. The SMG WORLDWIDE User’s Guide contains a list of frequently generated error messages. “Min Maintenance” is 30% of the team’s long + short value. If the teams total equity were to fall below this number, they would receive a margin call. Check Account Summary and Transaction Notes for the status of your account balance and the trades you have entered. 49

The math….. 140,710 / (281,420 + 0) = 50% 146,560.56 – 140,710 = 5,850.56 84,426 / (281,420 + 0) = 30%

Account Holdings 51 Enter A Trade & Pending Transactions Teams have 4 trade options: Buy Sell Short Sell Short Cover Teams also have the option of setting Limit Prices on their Buy and Sell orders. It is a good idea to use the Validate Ticker link before submitting a trade to ensure you are buying the appropriate stock. Check Pending Transactions to see the status of the trade you have just entered. The Cancel Order option is not available to those participating in the “Intra-day” session of SMG. Click on the yellow question mark for answers to frequently asked questions about a specific portfolio function. Help sections are available for each of the portfolio function pages. 51

“Short Sell” and “short cover” are the transactions used when taking a “short” position on a stock. A short position earns a positive return when the stock price falls. Enter a Trade

How to Read the Stock Market Page

Stock Table 49 39 ABC 1.30 3.25% 20 3314 40 ---- 80 BBA .40 .53% 26 52 Week High 52 Week Low Stock Div Yield % P/E Ratio Sales 100s Close Net Change 49 39 ABC 1.30 3.25% 20 3314 40 ---- 80 BBA .40 .53% 26 73016 77 75 76 + 1 66 38 CCI 1.20 1.87% 9 77723 63 64 18 13 LLY 1.78 11.12% 7 13101 16 8 XYZ 0% 62 6 10 - 1

52 Week High/Low Highest and lowest price a share of the stock has sold for in the past 52 weeks. Example ABC: High was 49 Example ABC: Low was 39 Sovereignty – complete independence and authority

Stock Varies by Newspaper Either company abbreviation or ticker symbol In A-Z order

Div Annual Dividend per Share of Stock Based on the rate of the Last Quarterly Payout Annualized Data Example ABC: $1.30 per share Example: XYZ: $0 per share

Yield Percentage Known as Dividend Yield A Measure of the Income Produced by the Stock Is the Amount of the Dividend divided by the Price of the Stock

Yield Percentage Achieved by Dividing the Annual Dividend by the Day’s Closing Price Example: ABC 1.30/40 = .0325 or as a percentage: 3.25%

P/E Ratio PRICE- EARNINGS RATIO Ratio: latest closing price of the stock to the latest available annual earnings per share of the firm Trailing P/E: is what is reported in the financial section of newspapers Forward P/E: based on forecasting net year’s future expected earnings

P/E Ratio Example: ABC – 20 P/E Ratio Indicates that ABC is selling for 20 times the company’s earnings Example: XYZ – P/E Ratio is 62 Indicates that XYZ is selling for 62 times the company’s earnings

Sales 100s This represents the volume of transactions on the trading day Bought or Sold Presented in hundreds, simply multiple by 100 Example: ABC – 3314 Indicates that 331,400 shares traded

High/Lows This represents the highest and lowest selling price of the stock for the day. Example: ABC – high of 40 low of 39

Close This represents the price of the last stock sold for the day Example: ABC – closed at 40

Net Change This lists the net change between the closing price for the stock for the day and the closing price on the previous trading day Example: BBA: Today’s Close: 76 Net Change: + 1 Previous Day: 75

Earnings per Share A means of valuing common stock. Part of a firm’s profit that is allocated to each outstanding share of common stock. Can be a good indicator of fiscal health

Earnings per Share Many investors carefully watch this number In general, higher earnings per share means better dividend and overall stock performance.

Earnings per Share Calculated by dividing the closing price on the day being consider by the P/E ratio. Example: Today’s Close P/E Ratio 40.00 20 Earnings per Share: ABC – $2.00