Student Guide - El Dorado High School



PROCEDURE

A personal checking account in the amount of $5,000 will be opened for each of you. You may choose to leave your capital there, which will protect it but it will not increase it, deposit all of part of it in a savings account which is safe and pays 5% compound interest, or risk your capital in the stock market which may maximize your profits or your losses. If you wish to open a savings account, see your Banker; if you wish to invest in stocks see your Broker when the Market opens. At the end of our simulation your percentage of wealth increase or decrease will determine your simulation grade. Your friendly and generous teachers will also consider your attitude and participation in the determining your grade.

DETAILS

Savings Accounts

Savings accounts are insured by the Federal Deposits Insurance Corporation (F.D.I.C.). Savings accounts pay 5% interest compounded daily.

Investments

You may choose to invest in one or more companies listed on our exchange. The probable risks and potential for profits vary for each company, and are described in your “Prospectuses.” You should use the prospectuses combined with the daily newscasts about world and national events to predict whether each stock’s performance will satisfy your investment goals. If you don’t trust your own judgment in this matter, you may seek out a classmate with more expertise to advise you; you would then pay her or him for those services. This person then becomes your Market Analyst. You may fire your Market Analyst or switch to another at any time. All Market Analysts must sign up with the Stock Market Supervisor.

Profits – Stock

You may profit from a stock investment by “speculating” (guessing) on the future price of the stock. Stock selling prices change often and sometimes have little relationship to the profit levels of the actual company. If you buy a stock at a certain price and later sell it at a higher one, the difference between what you paid and what you received is profit for you. When you bought the stock, you speculated that you could sell it later at a higher price. In this example, you profited by correctly speculating that the price would rise after you purchased the stock.

Profit – Dividends

You may also profit from your stock investments by earning dividends. Owning a share of stock is owning a part of a company. If “your” company makes a profit, the managers of the company can choose to reinvest that profit in the company to make it larger or wealthier, or they may choose to divide up the profit between the owners (stock holders) of the company. Distributed profits are called Dividends, and they are deposited in the stock holder’s personal bank accounts.

Profits – “Selling Short”

You may also profit by “selling short.” If you feel that the selling price of stock will go down you sell the stock to the Broker and agree to give it to him or her later. The agreement specifies the price. If, by the end of the trading session when you have to deliver the stock to the Broker the market price has gone down, you immediately sell it to him or her at the previously agreed upon price. When you sell short, you will have to pay your Broker 50% of the cost of the total transaction. If you would like more information about profiting from a downward trending stock by selling short, see the “Selling Short Addendum.”

Profits – Buying on “Margin”

Those students who desire to try for maximum profits from the Stock Market but at a greater risk, may “borrow” up to 50% of he their capital from the Stock Broker. This is called buying on margin and means that as little as one-half of the purchase price of the stock must be paid at the time of the purchase. The investor signs a “Margin Slip” (an I.O.U) for the balance due plus a 5% service charge. Margin debts must be paid for when called in by the Brokers. If you wish to buy on margin, see your Broker.

Check Certification

Single checks written for more than $10,000 or multiple checks in excess of that amount tendered at the same time must be certified by your Banker indicating by their signature that you have sufficient funds in your account to cover your draft.

Vulcan Electronics

This is a new corporation which has stated its intention to specialize in he research and development of electronic assemblies and sub-assemblies. Operations are conducted by a group of bright young college-trained managers and engineers. The management of Vulcan Electronics has shown its imagination and flexibility through several new but as-yet untested inventions of a military nature.

AT&T

The old American Telephone and telegraph was a stable, well respected pioneering giant in communications. The new AT&T has remade itself into a communications trendsetter.

AT&T has focused its business on combining cellular service with home internet service. It’s broad reach into different aspects of the communications market make it a competitor with such companies as Sprint, Warner Communications and DirecTV. This broader approach, and some lucrative partnerships with companies such as Apple, have helped AT&T transform itself overtime.

In the past, the management has encouraged investors to purchase large blocks of stock for steady dividend incomes.

Ford Motor Company

Ford Motor Company (FoMoCo) has generally had a competent management team strongly influenced by the Ford family. Sound management has helped Ford weather the storms of recent recessions and avoid the need for government bailouts to survive. This industrial giant has maintained a top position in the American economy for more than a century.

Changes in production, military contracts, and consumer spending have resulted in a fluctuating earnings record, but Ford’s sound management practices have kept the average dividends high.

Despite rising American salaries, Ford has held the line in production costs by using more foreign suppliers for all types of parts and assemblies, from steering and braking systems to sophisticated computer components.

Ford and the automobile are both traditions in the American way of life. Generations of Americans have shown loyalty to and confidence in the “Ford” trademark. The name Henry Ford stands for integrity, hard work, and free enterprise in a free society.

Baronni

This Italian-based company develops parts and mechanisms for autos and trucks. Its marketing agents report increasing sales in the United States, the European Union countries and Asian countries with expanding economies.

Panasonic

A well-established electronics giant, Panasonic is based in Japan with an American marketing subsidiary and large Chinese manufacturing plants. Because of the low-wage scale of Chinese technicians and skilled laborers, Panasonic has been able to compete favorably in the American market.

In the recent past, cheap ocean transportation and favorable tariffs have combined to make Panasonic’s steady growth possible.

Panasonic has specialized in the development of electronic components for transportation, communications and biomedical companies. It also manufactures consumer electronics items for home and business.

Panasonic’s management is well established and progressive. Reports from the management indicate a willingness to develop new techniques but only after exhaustive test and analyses.

Standard Oil of New Jersey

Standard Oil (Exxon) is presenting a new image to the public, but the company remains the well-established giant which has long been a foundation of the American economy.

Historically, Exxon has benefitted from special government policies designed to help big business, but it has sometimes been criticized for it rumored “involvement” in the internal politics of foreign countries. Whether these rumors are true or not, Exxon does depend on foreign sources for much of its low-cost crude oil.

Exxon’s management is stable, conservative and competent. It is more and more often the target of environmentalists because of its resistance to change. The company is countering these attacks by changing its name to a more modern sounding one, by extending its oil drilling activities outside the United States, and by developing new gasoline additives which they advertise as reducing exhaust pollution. Exxon has begun investing in greener energy alternatives, but it’s main source of income is still from drilling and processing crude oil.

Exxon’s steady earnings in bullish and bearish years have appealed to many investors as a hedge against decreasing money values (“Inflation”).

What Selling Short Means

In purchasing stocks, you buy a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or directly from the company. Brokers are most commonly used. They serve as an intermediary between the investor and the seller.

When an investor goes long on an investment, it means that he or she has bought a stock believing its price will rise in the future. This is what most players in our market place are doing most of the time.

Conversely, when an investor goes short, he or she is anticipating a decrease in share price.

Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept.

When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

When to Sell Short

The time to sell short is when you believe the price of a company is going down. “Bulls” may be selling their shares because they don’t want to lose money. “Bears” can now swoop in and make money on a downward trend.

Players make money by selling shares and buying them back at a cheaper price. If the price per share goes up, you will lose money. Why? Because you are buying shares at a higher price than their sale price.

Still confused? Just remember this: when you purchase shares, you hope the price goes up; when you sell short, you hope the price goes down.

Beginning a Short Sale

The Process begins with the player going to the broker. Tell the broker what company you want to sell short on and how many shares you want to sell short. The player then writes a check for 50% of the normal sale price. You do not get a stock certificate because you are selling shares, not buying them. The player writes “Sell Short” on the check to it does not get confused with the checks that players write to buy shares. The Market’s Board of Directors (your teachers) may put a limit on the number of shares that may be sold short. Brokers will record all sell short deals on their separate form. Forms should be kept in broker folders until the game ends.

Sell short deals are completed when the player decides to end the deal or when the broker call sell short players to the brokerage. A broker might do this if the Board of Directors recognizes that the sell short stock is no longer available for speculation.

Ending a Short Deal

Players begin and end sell short deals a the broker. The broker has a record of the transaction on the sell short form in the broker’s folder.

A Sample Scenario

Let’s pretend you sold short yesterday on Ford. You began the process with Ford selling at $60 per share and you believed the price per share would go down.

You decided to sell 100 shares, you write a check marked “Sell Short” for $3,000 (50% of the sale price). Today, the selling price of Ford is now $50 per share. If you close the short sale at this point, you have made a profit of $1,000. However, if the price went up to $70 per share, you would lose $1,000.

A Cautionary Note

Selling short allows you to make money on a downward trend, but making money this way is a lot like running with the bulls in Spain. It could be exhilarating, but it could get you trampled. It takes a special kind of nerve to sell short. After all, your potential to profit is limited (a stock can never go below $0), but your potential to lose is not limited.

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Wall Street

Stock Market Game

Student Guide

Introduction

The American dream of affluence – of a comfortable life achieved by working in a free enterprise system – is within your reach. Every American knows that if he or she just had a start, a grubstake, he or she could use his or her talents to become a wealthy and successful “self-made” man or woman. Your friendly and generous social science teachers are going to provide you what that “stake;” the rest is up to you.

The object of economic life and our simulation is to maximize your profits and minimize your losses. How well you do these things determines your standard of living and your simulation grade.

Prospectuses

Selling Short Addendum

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