A STOCK MARKET INVESTOR SIMULATION Developments in Business Simulation & Experiential Exercises, Volume 9, 1982 1 A STOCK MARKET INVESTOR SIMULATION Gene Lebrenz, University of Houston-Victoria ABSTRACT The purpose of this simulation is to help college students understand the objectives, process, and problems of personal portfolio management of stock exchange listed securities. This simulation provides a limited framework closely duplicating the required research, planning, and control of a personal portfolio. This is a financially riskless opportunity for students to participate in hands on investment decisions. This simulation is realistic, appropriately complex, yet easy to understand; it is relevant to today’s security investment concerns. While the simulation has some luck in its conclusions, the simulation process produces personal learning which can be quantified and graded in a competitive atmosphere of students and the actual stock market. INTRODUCTION It has become increasingly clear among instructors and their students that effective learning requires academic experiences approaching reality. Business educators have both an opportunity and a responsibility to provide that relevancy in their courses. But, the goal may be generally simplified and the course made more stimulative if students are offered an opportunity to learn about the investment markets through the use of a simulation. Massie has written with regard to management that a program can be checked out and operating conditions simulated. In this way, difficulties can be carefully considered in advance” [2, p. 6:33. A simulation experience may offer the student of investments what financial planning provides to top level corporate line executives--a chance to test out ideas before they become too costly to change. Of course, a chance to actually invest in financial assets of any substantial size would probably be the best learning activity. However, a well-designed simulation of the securities markets should enable approximation of that situation without the potential costs and risks of an actual financial commitment [4, p. 1]. The use of a simulation will allow a student of investments to make a “dry run.” The student may view the problem at hand, but he faces no personal financial risk [3, p. 1213. In the attempt to provide students with meaningful educational experiences, simulations thus approach reality but minimize costly errors. To be relevant, however, the simulation must be accurate in its format and combine the background theory of investing techniques with some student incentives and evaluations (perhaps a grade?). The evaluation might be determined by the instructor on the basis of change in size of the portfolio coupled with the logic and theory used by students in their written explanations for the actions they had taken. The marketplace would provide the incentive needed in reality since the potential loss of one’s capital should be sufficient reason to have most investors act carefully. Thus, while students cannot lose their money in simulation, a grade for the exercise may serve a similar function if the grade is carefully explained and determined. To initiate the simulation, the following material ray be given to the student. Modifications may be easily inserted if the instructor chooses to do so. These changes may help to meet the needs, abilities, and academic backgrounds of the individual students enrolled in a course. Since students are working alone in this simulation, there may be some concern over the lessoning of potential learning when compared to group experiences. However Gentry recently reported that group size had no effect upon group performance, but group size was relevant to the amount of dissention in a group [1, pp. 451-603. A consideration in this simulation to set up groups of students for securities selection and portfolio construction was dismissed in order to have this simulation more closely match real world activities. THE SIMULATION This simulation is designed to provide the student of investments with an opportunity to research, analyze, and practice the basic principles of investing in securities. Since this is a simulation, the results of the student’s investment operations will serve to provide only indications of SUCCESS, or (for lack of a better word) FAILURE at investment operations. However, failure here will be without financial cost since there can be no permanent damage to one’s individual wealth from a “simulation.” The following rules and forms have been developed to help the student appreciate securities market’s requirements much as the real world of investments might force upon an investor. In the real world, however, the cost for errors would be much higher than in this simulation. Forms The Investment Summary Fact Sheet (Form A) has been designed to encourage students to research and analyze corporations prior to making investment decisions. This form can be adopted as exhibited, or it may be adapted with modifications as appropriate for specific investment objectives. Forms B & C The Security Record, and Cash Balance Record, show students how to organize personal financial securities records and are used during the simulation to measure performance. Approach The student’s approach to this “game” should be as though the student did have the money to “play with.” Actions should be taken as if they were real. Hopefully, someday in the near future, real investment operations will not be a game. Now is the time to learn how to play, before investors can get financially ‘burned.” Developments in Business Simulation & Experiential Exercises, Volume 9, 1982 2 GROUND RULES Assume that your cash funds available for investment total $100,000. 2. Investments may be selected from any domestic stock, bond, warrant, put, or call (not commodity) listed in The Wall Street Journal. You may not buy U. S. Treasury securities. 3. Transactions costs are to be calculated at two percent (2%) of each purchase or sale. The amount of the transactions costs will be added to the amount of each purchase and subtracted from each sale to determine total net costs and revenues. 4. Securities may be purchased by using market or limit orders. a. If you purchase or sell by using market orders, the order will be assumed to have been consummated at the average of the high and low price listed in the Wall Street Journal issue which reports the actual transactions of that day, i.e., the paper. tomorrow. b. If you use a limit order to buy or sell a security, consummation of that order will be assumed to have taken place if the price range of the security (as reported in the Journal) is ever, subsequent to placement of the order--equal (on a sell order), or above; or (on a buy order)-equal or below the limit price you specified (unless you cancel the order before it is transacted) 5. Only round lots may be used for trading stocks. 6. Bonds are assumed to be of $1,000 multiple par values. 7. Dividend income will be added into your cash balance record if you own the dividend paying stock at the time it goes ex-dividend as reported in the Journal. 8. Interest paid to bondholders should be added to the cash balance record, if it would have been received by the owner of the bond. Accrued bond interest should be calculated when buying or selling bonds since it will not be taken into account in the market price of the bond when it is purchased or sold. 9. Tax free (municipal) bonds will receive special treatment of the interest received. You will assume that you are in a 30% marginal tax bracket and therefore municipal bond income (which is tax free) is worth 1/.70 = 1.43 times the interest received when added to your cash balance record. 10. All transactions will be assumed to be on a same- day settlement basis. Cash should be withdrawn and/or deposited to the cash balance record on the day the transaction takes place. Short sales are not permitted. 11. No funds may be borrowed to purchase securities. 12. Each purchase and each sale instruction (order) must be preceded by the completion of an “Investment Summary Fact Sheet.” This sheet should be retained and given to the professor each Monday for all transactions not previously reviewed. Justifications for purchases and sales must be outlined in less than 250 words on that sheet--prior to the placement of an order in the market. 13. Funds in the “bank” and not being used in the “market” will receive day-of-deposit to day-of--withdrawal interest. The calculation of interest income will be made by having unused cash in full units of $6,D00 earning $1.00 per day. This is about equal to the current rate of interest in savings institutions. 14. This simulation will begin on the date announced in class. 15. The results of your simulation will be determined by adding the value of all cash in the cash balance record plus the market value of all securities held at the end of the simulation. The securities’ valuations will be based upon their closing prices listed in the Journal issue one day after the last day of the simulation. You do not have to sell all your securities, just value them. 16. During the course of the simulation you must purchase at least five (5) different securities, place no more than 30% of your portfolio in any one security, and have no more than $20,000 in cash on hand after the end of the second week of the simulation. FORMS “A” Investment Summary Fact Sheet “B” Security Record “C“ Cash Balance Record REFERENCES [1] Gentry, James W. “Group Size and Attitudes Towards The Simulation Experience,” Simulation Games, Vol. 11, No. 4, 1980 pp. 451-460. [2] Massie, J. L. , Essentials of Management (Engle- wood Cliffs; Prentice Hall, 1964). [3] Terry, G. R., Principles of Management (Homewood: Richard D. Erwin, 1968). [4] Zif, J. J., and R. E. Otlewski, A Creative Studies Simulation (New York: The MacMillan Company, 1970). Developments in Business Simulation & Experiential Exercises, Volume 9, 1982 3 Developments in Business Simulation & Experiential Exercises, Volume 9, 1982 4 Developments in Business Simulation & Experiential Exercises, Volume 9, 1982 5 Table of Contents Volume 9, 1982 The Value of Conjoint Analysis in Enhancing Experiential Learning The Effect of Participation in a Collective Bargaining Simulation on the Expectations and Attitudes of Union and Management Representatives Conflict Resolution in Experiential Learning The Use of Simulation to Test Theories of Bargaining in a Business Context The Nominal Group Technique: A Vehicle for Improving Case Method Courses A Framework for Developing a Business Policy Case Produce Your Own Video Cases for Classroom Use: A Demonstration An Experiential Effect from Charismatic Encounters Nine Topic Oriented Mini Simulations: Descriptions, Purposes, and Observations A Hospital Simulator (HOSPSIM) A Report of the Model and Results Expected from Field Testing An Evaluation of SLIM (A System Laboratory for Information Management) An Experiential Exercise Introducing Students to the Role Ambiguity Faced by Salespersons The Advertising Research Project as an Innovative Experiential Learning Technique The Small Group Research Project: An Experiential Learning Approach for Undergraduate Marketing Research Students The Relationship of Cognitive Style Maps to the Preference for Experiential Learning of Undergraduate Students The Learning Style Inventory Debate Revisited: An Empirical Assessment fo the Construct Validity Issue Related to Experiential Learning Theory Conducting a Classroom to Facilitate Career Goal Attainment Corporation Executives' Ratings of Policy Learning Techniques The Generation and Application of Evaluation Criteria for Management Policy and Strategy Simulation Games Experiential Opportunities with Microcomputers Leading Students to Learning: The Teacher's Obligation An Experiment in Teaching Principles Courses: The Mini Debate Formula Developing Creative Thinking Through Experiential Learning Heuristic and Systematic Evaluation of Policy: Exercise in Decision Making A Case Study Approach for the Litigation Decision: Employing Decision Analysis to Determine When a Business Should Settle or Go to Court Learning Negotiation Skills Through Simulation Union vs. Management: A Simulation of Collective Bargaining in Action Inside the Black Box: An Analysis of Underlying Demand Functions in Contemporary Business Simulations A Review of Channel Exercises and the Description of a New Alternative SIMCON I: A computer Based Simulation Model for Evaluating Physical Distribution Strategies Involving Order Consolidation Toward Competency-Based Management Education: The Interpersonal/Communications cluster The Value of Pre-Teaching in Role Playing Some Effects of Positive Personal Reinforcement upon Socializing Students in an Experiential Learning Course Who Gains and Who Does Not from Experiential learning Toward the Ultimate Experiential Exercise, the Student View Simulating Professional Writing Experiences in the Classroom The Johari Window as a Measure of Personal Development Windows Into Management: A Participative Aid to Learning Get Your Faculty Involved A Pedagogical Approach to Business Gaming for the Commuter Student Super Service for Computer Game Administrators Expand the Role of Simulation with Creative Scenarios The Delivery, Administration, and Evaluation of an Executive Development Program Using a Total Enterprise Business Game An Application of Experiential Learning in International Trade and Foreign Direct Investment International Management: Building Bridges Analysis of a Business Simulation Exercise: Organizational Survival and Success The FALRIS Organizational Scavenger Hunt Trainee V. Trainee Subordinates' Evaluation of Experiential Learning Longitudinal Analysis of an Innovative Teaching Intervention Student Perceptions of Effective Teacher Behaviors Revisited Realism and Learning: The Evolution of a Management Game A Merger and Acquisition Simulation A Stock Market Investor Simulation Experiential Learning in Consumer Behavior: Perceptual and Attitude Change Exercises The Recycling Industry Problems of Women in Management: A Role Playing Exercise for a Course in Contemporary Organizational Problems Experimental Three Weekend Course: Empirical Results A Process for the Analysis and Development of Course Content and Instructional Methodology for Large Class Sections Problems Associated with the Assessment of Experiential learning Using the Multiple Choice Test Combining Lecture and Simulation Teaching Methodologies Qualitative Determinants of Team Performance in a Simulation Game The Effects of Different Team Sizes on Business Game Performance Comparison of Problem-Solving Technologies: A Free Simulation Approach Consistency in Business Games A computer Simulation of Personnel Selection Decisions Giving Praise Exercise Job Enrichment A Look at the Spoken and Written Word in Organizations A Pattern of Group Communication A New Generation in Business Simulation Adapting Mainframe Business Simulations to Min Computers File Access is the Essential Prerequisite to Time-Flexible and Interactive Computer Simulation A Microcomputer Simulation for Teaching Retail Location Strategy Blocks & Chips: A computer-Assisted, Geno-Typical Entrepreneurial Game Development of a Self-Paced Course in Business Statistics The Involvement of Student Bodies in the Teaching of Advanced Technical Concepts Systems Learning Sequence: An Experiential Course Module for Management Information Systems An Experiential Approach to Developing Managerial Competencies Communication Research, Inc. An Experiential Learning Activity Developed as a Practicum for a Course in Organizational Communication