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Guide: Stock Market SimulationThis simulation is presented as a teacher resource rather than a student resource because students should not know what the scenarios are in advance. It is important that the three student Investors react to the news and analysis in each scenario as they receive the information, just as they would in a real stock market situation.The Narrator and the Financial Reporter will both need copies of this teacher resource so that they can read their material to the class. The Accountant will also need a copy. Warn all three to remain silent about the opening market prices shown with each scenario because these opening prices are used to value the Investors’ portfolios at the beginning of each scenario.Simulation GoalsThe goals of this activity are to:Introduce students to the workings of a traditional stock market like the New York Stock Exchange, one with a traditional trading floorLet students experience simulated stock market activity of the sort that results from financial, economic, social, and company-related news or eventsThe RolesThis simulation contains 10 roles (including one for the teacher). The descriptions that follow explain the duties of the student (and teacher) actors assuming each role:Market Maker: The Market Maker is a stock market specialist who buys or sells the stock in which she specializes in order to equalize very short-term differences in supply and demand. This role, which the teacher plays, controls market activity during the simulation.Stock Broker 1: The student who plays Stock Broker 1 accepts buy and sell orders from Investors 1, 2, and 3 and executes them, if possible. Broker 1 either buys/sells with Stock Broker 2 or with the Market Maker, depending on which is more advantageous to Broker 1’s client Investor.Stock Broker 2: The student who plays Stock Broker 2 performs the same activities as Stock Broker 1 (see above).Investor 1—a conservative investor: Investor 1 is a private investor seeking to make investments appropriate to a conservative investor. This investor has an investment account with Stock Broker 1.Investor 2—a moderate investor: Investor 2 is a private investor seeking to make investments appropriate to a moderate investor. This investor has an investment account with Stock Broker 2.Investor 3—an aggressive investor: Investor 3 is a private investor seeking to make investments appropriate to an aggressive investor. This investor has an investment account with Stock Broker 1.Narrator: This student reads national, international, economic, social, political, and financial news to the marketplace. The students playing the other roles react to this news as appropriate to their function in the market.Financial Reporter: This student comments on the meaning of the news the Narrator reads and speculates on how it might affect ECPak’s share price and the stock market in general.Accountant: This student is responsible for recording stock transactions and cash balances on a white board or chalkboard as changes occur. The Accountant must have a calculator to determine the value of stock trades and maintain a running balance for all three Investors.Auditor: The Auditor is responsible for checking the Accountant’s work (looking for math errors).Setting Up the SimulationThis simulation occurs on the trading floor of the New York Stock Exchange. As a result, a Market Maker may be involved as the buyer or seller of last resort if buy and sell orders are not in balance.First, create four ECPak, Incorporated stock certificates out of scrap cardboard. Cut them each to 8.5” x 11” inches. Use a black marker to label each certificate “ECPak, Incorporated, Common Stock, 100 common shares.” Make the labels large enough to be read from the back of the classroom.Next, select students to play the nine student roles listed above. Try to match student personalities to the roles, especially the three Investor roles. For example, if possible, select a student with a somewhat aggressive personality to play the aggressive Investor.Then clearly explain to the participants what their roles are. Make sure that the rest of the students understand all the roles.Take each of the Investors aside individually and emphasize how their conservative, moderate, or aggressive investing tendencies should affect their actions in the simulation. Do this quietly so that only the student to whom you are speaking can hear what you are saying. Make sure the Investors clearly understand their roles because this is critical to the operation of the simulation.Stock Market Operational RulesThe Narrator reads brief national and international news articles on economic, social, political, and financial subjects to the marketplace loudly enough that the whole class can hear. The simulation participants react to this news appropriately to their role. Investors 1, 2, and 3 are to consider the current news and whether it might indicate a trend. Then they should decide if they want to buy or sell ECPak stock based on their investor type (conservative, moderate, or aggressive).At all times during the simulation, each Investor will have some combination of ECPak stock and cash in an investment account with his Broker. Explain to Investors that the purpose of the simulation is for them to maximize the combined value of their stock holdings and cash account.If one Investor wants to buy and another wants to sell, the two must negotiate a price between them through their Brokers. If they have the same Broker, then just that Broker would be involved.If two Investors want to buy and a third wants to sell, the buyers must bid against each other, with the highest bidder getting the stock. Again, this occurs through their Broker(s).If one Investor wants to buy and another wants to sell but they cannot agree between them on a price, they can buy from the Market Maker at the sell price or sell to the Market Maker at the buy price.If an Investor thinks the news is not important to ECPak’s share price, then she should do nothing.DirectionsBefore the simulation begins, the teacher creates a stock and cash investment account for each Investor, clearly labeled Conservative, Moderate, and Aggressive. Each Investor is to start the simulation with 100 shares of ECPak stock valued at the current market price ($25.00) plus $5,000 cash. Purchases decrease the cash in the investment account, and sales increase it. The value of each Investor’s stock holdings is recalculated at the start of each scenario based on the market price when the exchange opens for business. T accounts are used to record this information. Remember, because both the stock and the cash accounts are asset accounts, increases are recorded as debits (left side) and decreases are recorded as credits (right side).The students are to record a summary of the news and analysis in each scenario, and then record the action or inaction of each Investor.When the simulation begins, the Market Maker has already purchased 100 shares of ECPak stock earlier in the day. Each Investor also holds 100 ECPak shares purchased earlier in the year in his investment account.To make this simulation as realistic as possible, keep things moving. Remember, the market for a stock on a major exchange is very fast paced.Scenario 1Market price at start of trading day: $25.00Narrator: ECPak quarterly sales are 23% higher than in the previous quarter. Net profit is 21% higher.Financial Reporter: This increase appears to result from better and more focused advertising by the company, as well as from increased efficiency in the company’s manufacturing process.Scenario 2Market price at start of trading day: $27.30Narrator: The national average price of gasoline increased by $0.74.Financial Reporter: As a result of rising gas prices, forecasters expect a significant increase in sales of personal electronic devices as people attempt to entertain themselves more at home, a process many call cocooning.Scenario 3Market price at start of trading day: $28.10Narrator: The US Department of Commerce announced today that inflation has increased to an annual rate of 8.1 percent.Financial Reporter: Inflation makes money less valuable because it means more money is needed to buy the same amount of goods or services. In an inflationary climate, investors are very likely to shift their attention to the stocks of companies that have rapidly increasing earnings. These stocks are likely to increase in value faster than the stocks of companies that are not seeing rapid growth in profits.Scenario 4Market price at start of trading day: $28.45Narrator: ECPak filed a financial statement with the Securities and Exchange Commission today. It states that there was a major fire in the manufacturing facility of a supplier that makes plastic cases for ECPak’s MP3 players. The company states that it will be unable to manufacture MP3 players at full production rate because of the shortage of cases. As a result, it expects that shipments of the company’s only product will be 75% lower than had been expected for the quarter. ECPak is working with two new manufacturers to supply the cases, and the company expects to receive twice the usual quantity over the next 60 days to help it catch up with orders.Financial Reporter: The initial market reaction to this news? The market price of ECPak shares may decline as a result of this short-term disruption of production. An additional factor is the uncertainty attached to the company’s expectation that replacement cases will become available as planned. Shortages of the company’s product should allow it to increase prices by 25% in the short term. This situation should not have a long-term impact on the company’s ability to meet consumer demand, and demand for the product continues to remain steady.Scenario 5Market price at start of trading day: $24.50Narrator: ECPak filed a financial statement with the Securities and Exchange Commission today. It states that one of the two manufacturers ECPak has been working with to supply cases for its MP3 players has experienced significant quality problems. Most of the cases have been rejected because the quality has been so poor. The company is now working with another case manufacturer, but management expects that it will take 45 days longer to recover from the lack of cases than was originally planned.Financial Reporter: Initial market reaction to this news? The market price of ECPak shares may fall further due to the continuing short-term disruption of production. It’s unlikely that the company can raise prices further because of competition from other MP3 players.Scenario 6Market price at start of trading day: $24.00Narrator: The national average price of gasoline increased by another $0.56.Financial Reporter: Gas prices are at an all-time high. Economists are worried that this additional increase in the price of gasoline will cause a recession. If this happens, many people will lose their jobs, and they will not be able to purchase all of the things they usually would. Personal electronic devices are not necessities. It is very probable that sales of these devices will drop significantly in case of a recession.Scenario 7Market price at start of trading day: $22.10Narrator: The income tax decreases signed into law last year appear to be having a very positive effect on the economy. Industrial production is higher, unemployment is much lower, and consumer spending is higher than originally forecast by the government.Financial Reporter: When the government takes less money in taxes that leaves more in the pockets of the people who earned it. With more money in their pockets, people tend to spend more. That creates more jobs, which creates more income and more spending. The general increase in spending will benefit most companies, especially those whose products are already in high demand.Scenario 8Market price at start of trading day: $24.50Narrator: The ABC Company announced today that it will be manufacturing an MP3 player in direct competition with the ECPak model. ABC is a foreign company located in a country with very low labor costs and low taxes. Because its manufacturing costs are so much lower than ECPak’s, ABC intends to price its MP3 player at $50 less than the ECPak unit.Financial Reporter: Retailers have already placed advance orders for 500,000 units with the ABC Company. Industry executives expect that ABC will soon be the second largest manufacturer of MP3 players in the world. This market growth will come at the expense of ECPak, a company that currently has 65% of the world market for these machines.Scenario 9Market price at start of trading day: $28.90Narrator: ECPak Incorporated and the major online retailer of music today announced a marketing deal. Music lovers will receive a 15% discount on the cost of music with the purchase of an ECPak MP3 player. This offer is available only to customers who purchase a new player and send in a special coupon.Financial Reporter: One challenge of having an ECPak MP3 player with the ability to store thousands of songs is paying for those songs. Now the cost is 15% lower—but only for those who purchase a new player from ECPak. Consumers who buy competing machines cannot take advantage of this offer. This is a huge marketing advantage for ECPak and will allow the company to easily maintain its dominance in the MP3 player market. Many of the retailers who placed advance orders for ABC Company MP3 players are expected to cancel those orders.Assessing the ResultsAssess how the three Investors did by looking at the total value of their stock and the cash in their investment accounts. Which of the three types of investors performed better and why? ................
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