Financial Economics
Econ 479
Simulated Stock Market Game
Instructions
Prof. Thornton
Winter 2003
This assignment involves setting up and playing a simulated stock market game. You will play this game
throughout the semester and compete against members of the class and other invited players. The game
will be played on the VirtualStockExchange Web site. VirtualStockExchange was founded by alumni
from Stanford and Cornell University as an educational tool to teach students about investing in the stock
market. It is a simulated online brokerage firm that lets you do mock trading of all securities listed on the
major stock exchanges in the U.S. Thus, you will be buying and selling stocks on the Internet just like
you would if you had an account at an online broker.
Membership Registration
Go to the VirtualStockExchange Web site (http://www.virtualstockexchange.com). You are now at the
VirtualStockExchange home page. Under VirtualStockExchange, click on Join Now. Under What is
the Virtual Stock Exchange?, click on “Click here to register...” This takes you to the Registration
Page. Fill out the registration form. Note that your username can be any name you choose. I suggest that
you do not use your real name. This will help maintain your anonymity. When you are done filling out
the registration form, click on the Registration button. You should now see the Welcome page. This page
confirms that you are now a member of VirtualStockExchange, and gives your username and password.
You will use these to login to your personal home page.
Registering for the Economics 479 Stock Market Competition
Click on the Competitions button at the top of the page. You are now at the Competitions home page. To
sign-up for the Economics 479 Stock Market Competition, you need the following information.
Competition Name:
EC479 Private Competition
Competition ID:
emuecon
Competition Password: drtecon
In the box labeled “Enter the competition ID” in the middle of the page, enter emuecon and click the Go
button. When the new page appears click, “Click here to join Econ 479 Private Competition.” In the box
labeled “Competition Password” enter drtecon and click the Join button. You have now successfully
joined the EC479 Private Competition.
Rules of the Game
You begin the game with an online brokerage account with $500,000 in cash. You can use this cash to
purchase a portfolio of stocks. Any cash that is not currently invested in stocks will earn an annual
interest rate of 4% in your brokerage account. When buying or selling a stock, you must submit an order.
You can submit either a market order, limit order, or stop loss order. If you submit a market order while
the market is open between 9:30 A.M. and 4:00 P.M it will usually be executed within 20 minutes. If you
submit a market order after the market closes at 4:00 P.M. it will be executed when the market opens the
following day. Each time you buy or sell a stock, you must pay a brokerage commission of $29.95. This
commission is deducted from the cash balance in your account after each trade you make. This is the
same commission that the discount brokerage firm Charles Schwab charges for online stock trades. Your
brokerage account is a margin account, so you can buy stocks on margin or sell stocks short if you so
desire. If you buy stocks on margin (i.e., borrow money from your brokerage firm to buy stocks) you
must pay an annual interest rate of 6% on the amount of money borrowed.
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Portfolio Constraint
For this game, you must satisfy the following portfolio constraint: At least 25% of your portfolio must be
invested in stocks and/or mutual funds. No more than 75% can be invested in cash. You have until
Thursday, January 23 to meet this minimum portfolio constraint.
Nature of the Competition
You manage your personal portfolio that can include three types of assets: stocks, stock mutual funds, and
cash. You must choose how much of your portfolio you want to hold in stocks, mutual funds and cash.
You must also choose how many stocks to hold, which stocks to hold, and how many shares of each stock
to hold. Your score for the game is determined by the performance of your portfolio. The performance
of your portfolio is measured by the rate of return on your portfolio. The players in the game (i.e.,
students in the class and other invited players) are ranked by their performance. The player with the
highest rate of return is ranked first, the player with the lowest rate of return is ranked last. At any time
during the semester, you can obtain information on the rankings of all players, and determine your rank
relative to other players. Rankings are displayed by your username, not by your real name. Therefore, if
you don’t want other players to know your identity make sure that you do not reveal your username. The
player whose portfolio has the highest rate of return on April 15 wins the game.
Time Frame of the Game
The stock market simulation game begins Tuesday, January 7 and ends Tuesday, April 15.
Some Initial Suggestions
You are free to make any choices you want about your portfolio. However, you may want to keep in
mind some basic investment principles that emerge from Modern Portfolio Theory.
1.
The risk of a portfolio is measured by the volatility of the return on the portfolio. The more
volatile the return the more risky the portfolio. A high risk portfolio has the potential to make
either a very high or very low return. Alternatively, a low risk portfolio has the potential to
achieve a more moderate return. For example, the return on a high risk portfolio for the period
January 7 through April 15 might range from a possible high of 100% to a possible low of
– 50%. The return on a low risk portfolio for the same period might range from a possible high
of 10% to a possible low of –5%.
2. A major way to adjust the level of risk of a portfolio is by changing the relative proportions of
the portfolio held in cash and stocks. To increase the potential for a higher return, but also
increase the chance of a lower return, you can invest a larger portion of your portfolio in stocks
and a smaller portion in cash. For example, a portfolio that consists of 80% stock and 20% cash
is more risky than a portfolio with 50% stocks and 50% cash. If you are a big risk taker, then
you may want to hold your entire portfolio in stocks, and even borrow more money from your
broker on margin to buy more stocks. While this increases the probability of making a big
return, it also increases the probability of making a big loss.
3. It is possible to lower your risk without sacrificing your expected return by investing in a well
diversified portfolio of at least 15 to 25 stocks and or mutual funds. Diversified stocks are stocks
of companies whose stock prices and returns do not move closely together. For example, rather
than purchasing a stock portfolio that consists of all technology stocks, you would purchase
stocks of companies in different industries and sectors of the economy. Also, you would
purchase stocks of large, medium, and small size companies, rather than purchasing all small
size companies or all large size companies.
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4.
Keep in mind that each time you buy or sell a stock, you must pay a commission of $29.95.
Commissions lower your returns. For example, suppose that you are an active trader and during
an average week you make 20 trades. You will pay commissions of $599 per week. For the 3
month period of the game, you will pay total commissions of approximately $7,800. Everything
else the same, this will reduce your annual return by about 1.5%. Thus, for active investors to
outperform passive investors they must make higher returns on the stocks they buy and sell.
If you have little or no prior knowledge about the stock market and choosing stocks, you might want to
use one or more of the following strategies to decide what stocks to buy.
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2.
3.
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6.
Buy the stocks of one or more of your favorite companies.
Ask friends, relatives, and others for stock tips.
Select a portfolio of 15 to 25 stocks at random. For example, you might tape the financial pages
of the newspaper on a wall, shut your eyes, and throw darts. Whatever stocks the darts hit you
included in your portfolio. Some stock market experts believe that this type of randomly
selected portfolio will perform at least as well as stock portfolios of experienced traders.
Use financial information and/or stock market analyst recommendations to choose stocks.
Use the internet to obtain information on “Hot Stock Lists” and “Sample Portfolios.” Most
investment Web sites have suggested portfolios of stocks based on different investment
strategies, recommendations of stock market analysts, or stocks that have the biggest recent
percentage gains. Investment Web sites that you might want to check out include The Motley
Fool (http://www.fool.com), MSN Investor (http://www.investor.msn.com), Individual Investor
Online (http://www.iionline.com), Market Guide Investor (http://www.marketguide.com),
SmartMoney.com (http://www.smartmoney.com), Equis International (http://www.equis.com),
and Hoover’s Online (http://www.hoovers.com).
“Day Trade” stocks. This involves watching stock price movements during the day, betting on
the direction in which the price of a stock will move, and buying and selling accordingly. This is
a very risky strategy that is tantamount to casino gambling. It is not recommended by many
stock market experts.
As you learn more about the stock market in this class, you may want to modify your investment strategy
or adopt a totally different strategy. The choice of what strategy to use throughout the game is yours.
Requirements
After you successfully register as a member of VirtualStockExchange, give me your username. Every
other Thursday, beginning Thursday January 23, submit a print copy of your portfolio holdings page,
detailed view.
Good luck, have fun, and make lots of money!
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