The Stock Market Game

Economics and the Stock Market Micro vs. Macro Economics Going from a good idea to a corporation

Microeconomics Microeconomics studies the behavior of the consumer, household, or firm. Scarcity and choice Utility and profit maximization How do we allocate our budget, time? How do firms allocate resources to produce goods and services? Efficiency

Micro and the Stock Market Look at one company: How does this company make its product? Who buys the product? Does the company have good managers? Who supplies the company? Look at one industry: How much competition in the industry? Is the industry young or old?

Macroeconomics Macroeconomics studies the economy as a whole or as aggregates and attempts to predict or forecast changes in national output, unemployment, and inflation.

Macro and the Stock Market Look at the whole economy: Inflation: Producer and Consumer Price Indices (PPI & CPI) Employment: Unemployment Rate Interest Rates: Actions of the FED (discount rate) Productivity Use information to estimate good times to buy and times to sell.

When is the news good? Example: decrease in the unemployment rate: Good : sign of a growing economy = increased consumer spending = increased profits. Bad: with rising PPI, indication of future labor shortages = increasing wages = inflation = fed increases interest rates = decrease profits, slow growth.

One source of information US Department of Labor Bureau of Labor Statistics “Economy at a Glance”

Going Public From a Good Idea to a Corporation Product idea: the “widget” Need funds to start business – find investors “venture capitalists.” Each investor owns a stake or “share” of the corporation and has limited liability.

Going from a good idea to a corporation Suppose the company is doing well. You need more money – Go public, “initial public offering” Going public: investment bank creates a prospectus and buys all shares of stock and resells them at a set price to the public A “tombstone” is the public notice of an IPO

Investment Basics

Different Types of Investments: Insured Savings Accts Savings Bonds Certificates of Deposit Treasury Bonds Corporate Bonds Mutual Funds Stocks Collectibles Commodities

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: You own one portion of a collection of stocks, bonds, or other securities

The Three Main Markets NYSE New York Stock Exchange Oldest, largest, best-known stocks NYSE MKT LLC (formerly AMEX) American Stock Exchange Mid-sized growth companies NASDAQ Large, mid-sized, and small growth companies

The Difference Between Large and Small Companies Large: Often have high prices Low risk of failure Usually pay regular dividends Small Potential for growth is greater than for larger companies General prices are lower

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. The NASDAQ is considered to be an OTC market, with the tier 1 represented by companies such as Microsoft, Dell, and Intel. Be very wary of some OTC stocks, the OTC:BB (Bulletin Board) stocks are either penny stocks or hold bad credit records.

Long Term Investing The Best Route

Stock Splits More shares are created at a lower price per share, the investor has the same equity Indicated with an (s) in the paper Example: You own 100 shares of Dell at $30 per share. A 2-for-1 split of Dell stock means you have 200 shares at $15 per share

Short Positions: A short Position is a stock you borrowed from the broker and sold. The Value of the Short Position equals the # of shares X current price per share Total Portfolio Equity = Cash Balance + Total value of long and short positions

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. 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.

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. Limit price works the same way as a “sell”. The trade will only go through once the limit price is reached (you want to short sell at the highest price possible) All rules for selling still apply.

Short Covering Must have already short sold the stock Must not exceed total number of shares actually traded in the market that day The short cover works like a buy transaction; if a limit price of $50 is entered, the short cover will only go through if the stock’s price is $50 or less per share (you want to short cover at the lowers price possible). All other rules for selling apply

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.

Normal vs. Inferior Goods Normal goods Goods that you buy more during good economic times (gourmet foods, fresh veggies, individual entrees) Inferior goods Goods that you buy less of when economy is good (cheap soda, potatoes, pasta, canned beans) Stock traders watch this… If we’re experiencing poor economic times, invest in inferior goods. If we are in good economic times, invest in normal goods.

How to Play the STOCK MARKET GAME

SMG Basics Real-time stock market simulation Played on the internet from any computer Each team begins with $100, week trading period (10/08/12-12/14/12) Invest in most stocks and mutual funds traded in the three major US exchanges Teams of 2 students

SMG Basics 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

SMG Rules Rules to note… Transactions are made at the SMG WorldWide site at: Trades are made based on prices at time of order. If trades are made after 4:00 PM, then they are made at the next day’s opening price (at 9:30 AM). Game week runs Monday thru Friday. Stock and cash dividends are automatically computer into team portfolios Portfolios are updated and available on a daily basis. 5% interest is earned on cash balance. Rankings are updated every weekend.

Buying Stocks Ticker symbols available online Must be a minimum of 100 shares Must have a closing price of at least $5.00 per share Must not exceed total number of shares actually traded on the market that day May set a maximum purchase price limit, the maximum you are willing to pay

Selling Stocks Must already own the stock Must be 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. Must not exceed total number of shares actually traded on the market that day May set a minimum selling price limit. The sale will not go through until the stock price reaches or exceeds the limit price.

Buying on Margin You may borrow part of the required funds using the stock in your portfolio as collateral for the loan. If the Total Equity in your portfolio falls below 30% of the value of your ‘long’ and ‘short’ positions, your team will receive a margin call. This figure is only relevant for teams that have borrowed money. Interest charged at 7% Initial Margin Requirement = 50% Margin call must be satisfied by 3 rd week Maintenance requirements are calculated as % of total value of long and short positions

Where to get more info… Internet Yahoo! Finance: The Street: NYSE: CNNfn: EDGAR Database of Corporate Information:

GOOD LUCK!