Throughout profit, I lost profit because it spiked
Posted On May 17, 2019
Throughout the course of the stock market game, I was able to learn a few things about how the market works, and the anxiety it gives to people who trade. I realized that if this was in real life, I would be losing quite a lot of money and that it’s a large gamble. In this game, I ended up losing a lot of money due to a multiple of reasons. The first reason being that the website enters your transaction 15 or more minutes later. Therefore, when I covered a stock that was going down, instead of making profit, I lost profit because it spiked up by the time it completed the transaction. Another reason why I lost money was that the game charges $10 on the stocks that you buy and short. Therefore, you have to buy or short stocks in large quantities to make up for that $10 and the money that you shorted it with. I was skeptical for quite a while when a few people in the class were making more than $100,000 and were eventually making millions. That made me wonder what the strategy they were using to make that much profit. I later realized what they did when I checked the ranking list and they were in the negatives for profit. In the first few weeks, I usually bought stocks that were quite stable so my account balance didn’t have a significant shift. I realized that in order to get that huge profit, you have to short stocks that are gaining at an incredibly high rate that’s not supposed to or doesn’t have a good quarter report but is still gaining. You then short the stock in large quantities such as in the thousands or however much your buying power allows. Although they are in the negatives for quite some time, they eventually gain it all back and make a lot of profit. With my experience, however, I didn’t want to take that big of a risk just in case it jumps up and never goes down to the amount I want it at. For an example, one stock that I was glad I didn’t touch was LFIN. Everyone shorted that stock around $16 but then it suddenly made the biggest jump to $126. Many people lost profit and still couldn’t recover because it’s gone down to $40 by now and it will probably be highly unlikely that it will decrease even more to $16. That’s why I decided to play on the safe side and short smaller amounts on different stocks. One of my largest trade was a recent trade where I shorted 34 stocks of Netflix at $197. It was not a successful trade as I didn’t make any profit because it is the new year and Apple has been rumored to buy Netflix so the stocks went up to $212. One of my most successful transaction was when I shorted Netflix on November 28th. When I looked at this stock I saw a news article on Yahoo Finance that stated that their third-quarter earnings weren’t all that bad but they weren’t over the top great either so for it to reach $200 was over the expectations. I decided to short it at $199 and the next day I covered it at $188. I was surprised at the drop because I was only expected it to go down around $2 which is a big drop considering Netflix is a big company. Another successful transaction that I had was CVRR on December 21st. I shorted 60 stocks of CVRR at $14.80 and it dropped down to $14.75 which was when I covered it. I got lucky that I shorted the stock at that price because it increased to $16 within the next week. On top of that, another transaction where I made profit was with MOSY on November 14th. I shorted 80 stocks at $1.69. I then covered it the next day at $1.58. One transaction that was my most unsuccessful was with JCPenney. I shorted 90 stocks at $3.18 on November 16th and I covered it at $3.44 on November 28th. JCPenney was one of the stocks where I held onto it the longest but it didn’t seem to be going down so I just covered it. Based on my personal experience, it taught me a valuable lesson that in the future, I should not touch stocks ever if I want to keep myself away from even more debt. Not only could I lose hundreds of dollars, if it goes to negative, my house and other items could be repossessed by the government. I feel as though if I were to ever go into the stock market in the future, I would have some of these lessons with me and I would remember to be patient with the stocks. If it goes up, it will eventually go down so you have to wait awhile.Page 3: Stock Market Basics The world of stocks is one of most uncertainty, anxiety, and pressure that requires you to have the patience and time to check the stock market on a regular basis and follow news reports of companies’ quarter earnings. A stock market is a virtual place where people buy, sell, and trade stocks from a company to gain capital. A stock is a share of a company’s earning, meaning if you buy a stock you own a small share of that company. There are many stock markets in the United States and around the world. Two of the most major stock exchanges in the world are located in New York. They consist of the New York Stock Exchange and the NASDAQ. It is stated that the United States is one of the most influential in the stock exchange as they have a market capitalization of over $1 trillion. Nations where capital exceeds $1 trillion are part of the title “1 trillion club.” These nations with powerful stock markets include the United States coming in first with $15 trillion, followed by the EU with $13 trillion, China at $11 trillion, Japan at $6 trillion, Germany at $3 trillion and France, India, Russia at $2 trillion. Other major stock exchanges around the world include the Shanghai Stock Exchange, TMX Group in Canada, Korea Exchange, SIX Swiss Exchange and Australian Securities Exchange, just to name a few of the top 20 stock markets.The reason why companies issue stocks is because they need to raise their capital. A way for them to do that is by making their company public and basically, sell a small part of their company called shares. That way when people buy shares from the company it raises the company’s capital rather than that company having to get a loan from the bank, issuing stocks is another option companies use to get revenue. An IPO, also known as an initial public offering, is when a small private company wants to expand their revenue so they decide to go public. Issuers then decide with the firm what’s the best price to offer to the public, when to go public and how many shares they should issue. This gives small or big private companies a chance to increase their capital by going public. A secondary offering occurs after a company has gone through the initial public offering and the company decides they still want to increase their capital. A secondary offering does not benefit the company but rather the shareholders. For an example, if a shareholder buys a share when the company had its IPO, the earnings go to the company because they are the issuer. However, in the case of a secondary offering, the shareholder decides to sell his shares in the market. Because he decides to sell them it’s the second time that those shares are in the market and whatever money he makes, he benefits from it. People buy stocks hoping to make money from it. For an example, if a shareholder has 5 stocks that is worth $1 when the price of the stock jumps up to $2, the shareholder could sell it in the market and would have $5 of profit. The more shares people buy the more they could make, which intrigues people into the stock market because they could become rich from this trade. There are four ways to measure the value of stocks which are through P/E, P/B, PEG, and dividend yield. The first one is the price-to-earnings ratio (P/E) which is the most common one people look at for stocks. When a stock goes up in price without a significant explanation as to why it spiked up, people then resort to the company’s earnings. If the earnings of the company don’t exceed the expectation of shareholders or there are no earnings at all, the price for that stock will fall back down. If price-to-earnings ratios are not enough, people use the PEG or price to earnings growth ratio. Not only does it look at earnings and the price, it also incorporates the growth rate of the company’s earnings over the past years. If the PEG ratio is low, you’ll get a good deal in the future for their earnings. Another way to measure the value of stocks is through dividend yield. Investors like seeing stocks that pay a dividend because that means that even if their stocks drop, the shareholders will still be paid. The last option to measure the value is through P/B which is the price-to-book. If your P/B ratio is low, it can protect you because it is based on the company’s assets such as building, land, and equipment. Page 5 Stocks, Past and Present In our contemporary world, the stock market exchange is one of the most influential parts of the economy as many countries depend on them for capital growth. However, it was never as smooth or powerful as it is now. The stock market had a rough start to it and there were many struggles along the way. The birth of the stock market in America leads back to the 1700s from the influence of other countries such as Belgium that started in the 1500s. Although it started as early as the 1500s, they actually never traded shares of a company but rather affairs of businesses and the government. Before America became the leading country of the stock market exchange, there were a lot of downfalls and history of where the stock market thrived with barely any exchanges. The beginning of the stock market exchange in America started with the Philadelphia Stock Exchange that was founded in 1790. It wasn’t until the creation of the New York Stock Exchange (NYSE) in 1817 that shaped how global the stock market exchange was going to become. The reason why it was such a powerful stock market was that there was no other competition within the U.S. and it was at the center of trade in America. Although the stock market was going really well, there were unexpected times where there was a major crash that caused pandemonium amongst the economy. One major event that caused an uproar in the American economy was the stock market crash in 1929 of the Great Depression also known as Black Tuesday. It was a time with no economic stability and security for Americans and was the biggest devastation for the nation. During the roaring 20’s, the stock market went through rapid expansion with extreme economic growth. Around August of 1929 was the height of the stock growth that encouraged many banks to invest in stocks. Even investors were convinced of exploiting this opportunity to gain profit. Despite signs of obvious trouble for the economy such as a decline of steel production, large debts from the easy obtainment of credit, and slow farm production, the stock market was still going up. However, around October 24, 1929, there was a sharp downfall in the stock market. One of the reasons why it crashed was that the actual value of the stocks was very unclear and a month before the downfall, the London Stock Exchange crashed when the top investors were arrested for fraud. The London market crash deeply increased the insecurity of American investors who were scared of the instability. People began pulling out their stocks or selling them because they were scared that it might crash. Because of that panic in 1929, it serves as a symbol of an economic crisis that America should learn from so that it doesn’t occur again or could be avoided. Many still debate on the reason as to why the crash happened. Some say it was due to abuse of utility holding companies whereas others blamed commercial banks.Another stock market crash that was compared to the 1929 stock market crash was the crash in 2008 following the Great Recession. Great shock came from society as it was the first major crash in the 21st century. Like how the stock market crash in 1929 was one of the causes of the Great Depression, the stock market crash in 2008 was one of the causes of the Great Recession. Around the same time as the stock market crash of 1929, it happened on September 29, 2008. The drop of the Dow Jones Industrial average was the biggest drop in a single day of history with a drop of 777.68 points. The reason for this drop was because Congress decided to reject the Bank Bailout Bill. This bill helps banks who are having trouble by giving them the right to enter a bid price to sell their assets. Not only does it help out failing banks, it also helps homeowners whose houses are about to be foreclosed. It guarantees homeowners that they would get help with loans and adjustment with mortgages. The bill also removes the mark-to-market rule in which it now forces banks to keep their mortgages valued at its true worth. Because many people in Congress felt like it was forcing taxpayers to reward bank decisions that went bad, they rejected it, causing the market to plummet. This lead to the fatal start of the Great Recession that blew up the media and the whole country. Page 7: GDP and the Federal Reserve System GDP stands for the gross domestic product which is the total monetary measure of all the services and goods of the country produced in the year. This is the best way to evaluate the country’s economic performance within the year. If a country has two consecutive GDP value in the negatives, that means they are in recession. Although GDP is usually based on the annual report, it could also be reported based on quarterly reports. The reason why it is an important number for any economy to keep track of is that it illustrates which country has economic growth or decline, as well as their productivity when it comes to the overall health and standard of living of the country. The components in order to determine the GDP of an economy is based on 3 methods. These three methods include the expenditure approach, the income approach, and the production approach. The most common method of calculating GDP is through the expenditure approach where it calculates the overall spending of different groups such as how businesses spend money on investments, consumers buy goods, and imports/exports. All of these spendings contribute to the economic value of the country and its standard living conditions. Whereas the expenditure approach looks at the spending that aids in economic growth, the production or output approach looks at the exact opposite. The production approach looks at the value of economic output and takes out the cost of any goods and services. The last approach is based on the income of the country. Based on the factors of production, the money circulated around is calculated to determine the GDP. Not only does it base it on the factors of production, it also includes sales tax, property tax, and depreciation from businesses. Because GDP is based on the money value of an economy, it can’t really be told if the GDP increased based on a production growth in the economy or because the price on goods and services increased. The difference between real and nominal GDP is that with real GDP, the values get adjusted based on price changes whereas the nominal doesn’t, therefore the graph for nominal GDP is always higher than the real GDP.