Using The Stock Market Game (SMG)

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1 Using The Stock Market Game (SMG) Created by Amy Cornelisen, Garin College What is a Company? A is a person or group of persons that create a product for others to buy. The product may be something that is made, supplied, or a service. There are many different types, all based on type of ownership. What are the Types of Companies? Which is which? Private Owned by one or more people Responsible for all profits and losses in Owners must use their own money to expand Can NOT buy stock in these companies Stock is owned by the founders and sometimes by the employees Public Owned by Shareholders You CAN buy stock in these companies Has a board of directors that run the Private Public Private Public Examples Mars Corporation (M&Ms, Mars bars, Snickers, Kit Kat, and many other diverse products) Privately held Can not buy stock in this Owned by a family Money for expansion comes from banks or private investors Hershey (Kisses/other chocolates and many other diverse products) Publicly owned Can buy stock Owned by shareholders Managed by a Board of Directors Money comes from selling more shares of the 1

2 HOW DO COMPANIES GET MONEY TO EXPAND? Can borrow money from a bank, which they will have to pay back with interest. Can get an individual Investor to give them money for a percent of the profit. Can sell shares in their. BORROWING FROM A BANK The amount borrowed is called the principle Interest is a fee paid to borrow the money The must immediately start paying back the money they borrowed plus the interest. Ex. Company A borrows $500,000 from a bank for 1 year at 9%. Total Amount borrowed: 500, = 545,000 Divided by 12 equals the amount due each month $45, due each month The Company is still only owned by the original people. The Company keeps ALL profits GETTING MONEY FROM A PRIVATE INVESTOR Company approaches an investor Investor decides whether or not to give the money in exchange for a portion of the profits Example: Investor gives $500,000 but wants 40% of the profits Company makes $40,000 in profit, 40, = 16,000 Investor gets $16,000 of the profit, gets $24,000 Company has the money they needed but now has to ALWAYS pay the investor part of their profits The Investor is hoping that in the long run, they make more than the initial investment. SELLING SHARES An Initial Public Offering (IPO) is made through an Underwriter. The Underwriter decides on offering price and finds specific investors to buy the initial shares from the. A Tombstone ad is placed in the newspaper announcing the sale of shares to the public from the investors The Company gets their money from the original investors and the stock holders can only lose what they invest. The is now owned by the people who have bought the shares. Morgan Stanley is the investment bank that will enable FB to sell shares in the new issues market to specific investors. These investors later sell their shares to the general public. Can invest in Stocks, Bonds, or Mutual Funds that are traded on the NASDAQ, AMEX, and NYSE 2

3 Bear vs Bull Markets Stock Symbols Bear Downward trend in market Investor fear and pessimism Bull Upward trend in market Investor confidence Anticipation of future price increase 1 to 5 letters in length depending on the exchange it is being sold on No special symbols = common stock pf = preferred stock Make sure symbol matches GAP is NOT The Gap How do you choose a Stock? Research companies you know via MSN Finance Yahoo Finance The 3 stock exchanges Understand stock Risk terms P/E ratios Beta numbers 52 week hi/lo Dividends offered Investor recommendations/analyst Opinions Preferred Guarantees dividends Lower risk Less potential gain No voting rights If bankrupts, preferred stock holders are paid first Types of Stock Common Dividends based on profits Voting rights Example of Stock Information P/E ratio: Price to Earnings Ratio Market Symbol Must be used to compare 2+ companies of the same type Share price divided by earnings per share High ratio Over valued Higher cost for a dollar s worth of earnings Low ratio Under valued Lower cost for a dollar s worth of earnings 3

4 Beta Number (how sensitive a stock is) Measure of risk equal to 1 Stock moves with Market If Market goes up 20%, Stock goes up 20% Greater than 1 Stock is more volatile Market goes up 10%, Stock goes up 15% The larger the number, the more volatile Less than 1 Less sensitive to market change Change occurs more slowly than the market 52 Week High/Low This shows the range of stock value for the last 52 weeks If your stock is currently valued near the high end of the range, will it potentially go higher? If your stock valued near the low end of the range, will it potentially go back up? Dividends Offered Dividends are a percent of the profits paid to the stock owner Each share is paid a dividend on a quarterly or yearly basis (depending on ). Not all companies offer dividends Target Price AT 52 WEEK HIGH! Dividend of 20 cents is paid on each stock Analyst Opinion/Market Movers Also called Expert Picks Top analysts give their opinion on what stocks to buy and/or sell Good starting place to find stocks See which stocks are changing a lot Expert Picks 4

5 Most Price Change Stock A Price Decision Making Matrix Analyst Opinion Beta Number P/E Ratio 52 Week Trend Trend over 2 years Dividends Stock B Stock C Trades are Processed Once a Day, Upon Market Closing (EST) Limit Price! Even though in the real world one can trade any time of day for this game all trades are processed at the end of the day Best to place a Limit Price (maximum/minimum ) on your buying/selling price in case of huge fluctuations in market throughout the day Sets a MAXIMUM value you are willing to pay for the stock If the stock goes higher before the end of the day, the trade will not go through Trade WILL go through if price falls to below your maximum Sets a MIMIMUM value you are willing to sell your stock The Dow Jones Industrial Average/S&P 500 Indicator of stock market prices Selected by a committee In 2011 a handful of non-us companies were added Dow Jones Based on the share values of 30 American companies listed on the NYSE S&P = Standards and Poor s Based on the prices of 500 American companies Rules of the Game Teams are given a theoretical $100,000 Must buy 100 shares at a time Can sell any amount Shares must cost more than $5 All transactions are processed at the end of the day, Monday-Friday, Eastern Standard Time (that s Tues-Sat for us) Teams are competing against the S&P 500, percent return Teams are charged 2% brokers fee for EACH transaction Teams do not liquidate their portfolio at the end of the game 5

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