Stock Market Simulation - Coursework Example

Stock Market Simulation Table of Content Table of Content 2 Introduction 3 1 Goals, Scope, General Plan 3 2 Why people should invest in stock market 4 1.3 The Language of Stock Market 4 1.4 Types of Stock Market Analysis 5 1.4.1 Fundamental Analysis 5 1.4.2 Technical Analysis 6 2. Some Common Trading Strategies 6 2.1 Breakouts Strategy 6 2.2Swing Trading 7 2.3Trend Trading 7 2.4 Retracements 7 2.5 News-Based Trading 8 3. Selected Companies 8 1. Introduction In this paper, I present results of a five-week long simulation in the U.S stock market in fulfillment for WPI Interactive Qualifying Project; I will participate in this simulation and present the findings of this project. The project will offer a great learning opportunity for the future. The following section will present the plan, the goals, and the language of stock market. Moreover, it will emphasis on the leverage of investing in the stock market, as well as illuminating those companies that have the potential of encouraging individuals to inject their investments into the companies. Some of the companies such as Apple Inc, Amazon.com incorporation, and Exnonn Mobile Corporation, and AT and T Company have proved to be lucrative in relation to stock market investments. 1.1 Goals, Scope, General Plan The main goal of this project is to gain experience in stock market investment that will provide a powerful tool for future investment. During the five week simulation, I will apply a trading strategy that I picked out of several ones and evaluate the profits that are generated from it for a testifying purpose. This experience will be a very powerful since it will talk about the stock market and how it functions through it. The scope of this project is to invest in the U.S stock market by doing a five week simulation, using the Wall Street Survivor website. Throughout the simulation, I will choose a trading strategy to use and select between five to seven companies to trade. The general plan for this Interactive Qualifying Project (IQP) consists of five stages. First, to get to know the U.S stock market by researching, finding resources and learning terminologies. The second stage encompasses choosing a trading strategy to use as a guide throughout the simulation. The third involves selecting 5 - 7 companies to use for this simulation, which can be changed at any time during the simulation while the fourth entails directing ,recording and reporting the weekly transactions of the simulation that will be five weeks long. Fifth, at the end of the simulation the results will be shown to justify whether the strategy is good or not. 1.2 Why people should invest in stock market The common goal among people is financial security. The only way to achieve financial security is to save and invest money over a long period of time and that is investing. One source of investing is stock market which could be a great source of wealth maker, especially when it is supported by profitable trading strategy. Stock market is known to have a great amount of risk; people should know before they invest that they may lose some or all of their money; however, it is also known that big risks generate big profits. Therefore, people should take the risk of investing in stock market in order to gain profits and secure their finance (Buehler and Kacy 44). It often draws too much attention due to huge losses and gains that usually characterized venturing into this type of investment. Once the risks are managed, the investor can not only secure his or her financial position but also make money. Investing in the stock market enables individuals to grow their money due to the fact that the stock market tends to increase in value with time. This is despite the fact that individuals stock prices often increases and decreases on daily basis. Moreover, it is advisable for investors to inject their investment in this mode of investment through companies that are stable. Stable companies are not only capable of growing but also making significant profit for the investors. Besides, it is prudent to invest in more than one stock as it leverages growth in the various segments of the market or economy. It somehow guarantees profit even in the event that some of the individual stocks undergo losses (Mayer and Hanneke197). Some investment in the stock market may result into income in terms of dividends. Some stocks offer the investors with dividends on annual basis. The payment even in the event that the value of the stock has been lost is guaranteed. In addition, diversification of the investment into different stock market is ideal in that the stock market investment independently change value in reference to other types of investments. The finally advantage of investing into the stock market is the ability of the investor to take ownership stake in the stock of purchased company. It is prudent to comprehend the basics of stocks and the factors that cause the prices of the stocks to change. The changes in the stock market are the consequences of the forces in the market. One of these factors is related to both the demand and supply. The stock movement of the prices in the market is an indication of the feeling of the investors concerning a particular company. A company’s value is its market capitalization. It involves the multiplication of the price of the stock and the number of outstanding shares. The value of a company is usually affected by its earnings. It encompasses the profits it realizes though the company has the potential of surviving without these earnings. Public companies have the obligation of reporting their earnings in each quarter (approximately 4 times on annual basis). Several theories have attempted to explain the movement of the stock prices theory though there is no theory that has been able to give an absolute explanation to this phenomenon (Kuepper Para 4). 1.3 The Language of Stock Learning the language of stock market and looking at the terminologies, which are used in the stock market environment, is the first step in investing in the stock market. A stock market is where investors exchange equity for cash or the opposite. In general, there are two types of companies, a private company and a public company. A private company is a company that is usually owned by a small group of private investors, while a public company is a company that is divided into many small shares which the public can own and trade. In this trade, the shares are called stocks (Mayer and Hanneke 197. Stocks are generally divided into four types: large-cap stocks, mid-cap stocks, small-cap stocks and micro-cap stocks. They are majorly dependent on the market capitalization. Market capitalization is a number that shows how much a company is worth in the stock market. The way of calculating market capitalization is to multiply the number of outstanding shares the company has by the current price company stock. Large-cap stocks are the stocks of companies with market cap greater than $5 billion. Mid-cap stocks are the stocks of companies with market cap between $5 billion and $500 million. Small-cap stocks are the stocks of companies with market cap between $500 million and $150 million. Micro-cap stocks are the stocks of companies with market cap less than $150 million (Kuepper Para 3). There are many important terms that the beginner investors should know about before they start to invest. First, stock chart is simply representing the stock market as it shows the change of the price of a single share of a specific company during a time period. Education on stock chart is crucial in the investors performing technical analysis. It helps in the comprehension of the price patterns thus giving the traders the edge of predicting the movement of the stock. Second, volume is the number of transactions that occurs in a certain period of time. It helps in the determination of the momentum of the market. Third, trend line is an important tool, which is used to identify and confirm a stock price. Another important terms are bullish market or bull market which it means the stock market is going in an uptrend; whereas, bearish market or bear market means the stock market is going in a downtrend. Finally, the bid price is what buyers are willing to pay for a particular stock while the ask price is what sellers are looking for to sell a stock. The deferent types of charts that investors inclusive of traders employ are the line charts, the bar charts, candlestick charts, and point and figure chart. The line charts represent the closing prices within a particular set period of time. Furthermore, the closing prices are connected to form the line over a period of time. However, the lines do not provide information that is visual for individuals’ points in terms of trading range. The closing prices are perceived as the most vital price in the stock. On the other hand, the bar charts are expansion of the line chart as it tends to add information to every data point. The vertical lines are the representation of the data points. However, candlestick chart is relatively similar to the bar chart though the difference manifests in its visual construction. It has thin vertical lines that illuminate the trading range period. 1.4 Types of Stock Market Analysis Stock market analysis encompasses the evaluation of specific or rather particular trading modalities/techniques inclusive of the investment segment ore even the market holistically. It is a techniques and a method that traders, as well as investors employ in making decisions pertaining purchasing and selling. Studying and evaluation of the current and past data can help the traders and the investors gaining leverage in the market as it helps in making decisions that are well informed. There is two ways to analyze the stock market. These two ways are: fundamental analysis and technical analysis. 1.4.1 Fundamental Analysis Buying some shares in the stock market implies owning a small piece of a company. This idea seems to be taken for granted for many investors, which causes investors to lose a great amount of money. When investors want to buy a stock they have to remember that by buying stocks they own a piece of that company. That’s why, before buying a stock an investor should do what is called fundamental analysis, which can be done by looking at the type of products this company produce and the revenue they generate. Also, investors should look at the company’s balance sheet in order to find the assets and liabilities that are associated with the company in order to decide if this company is able to compete in the near future. At the end, fundamental analysis is the tool that helps investors to decide which company they should be investing in. Investors who are looking for a long-term strategy for trading commonly use fundamental analysis (Buehler and Kacy 44). Fundamental analysis focuses on data obtained from various sources such as the economic report, the financial records, market share, and the assets of the company involved. It is performed on both the present and historical data with the aim of making forecasts in terms of finances. One of the objectives of fundamental analysis is conduction of stock valuation of a company and the prediction of the evolution of the prices. The second objective entails projecting the performance of business while the third one involves evaluation of a company’s management and making decisions that are internally based. The finally objective may entail calculation of the company’s credit risks. In the fundamental analysis, it is maintained that security may misprice the market in a short period of time though the right prices is often reached. Profits can be realized through the purchase of mispriced security after which a waiting period is given until the market is cognizant to mistake in pricing hence reprises the security. The fundamental analysis involves the analysis of the industry, economy, and the company in question. 1.4.2 Technical Analysis Technical analysis is a tool for investors to look at the price history of a company that they would like to invest in. There are so many strategies associated with technical analysis and each strategy uses a different set of indicators. Technical indicators are mathematical models that try to predict the future of a stock based on the price history. A technical chart usually consists of a section that shows the price history, and a section that shows the volume (Fontanills et al. 2002). Finally, investors should use fundamental analysis first in order to decide what stock they want to buy, and then they can use technical analysis to predict the future price of the stock. It concentrates of past actions of the market in predicting the future movement of the price. In this analysis, it is maintained that all the information is in the security price. Moreover, it also involves the analysis of trends and the response of the investors to the movement of the prices result into charts price patterns that are recognizable. Investors have the leverage of choosing either of the above methods or even both while picking the type of stock to invest in. 2.0 Some Common Trading Strategies There are many common trading strategies; however, Stock trading strategies vary from investor to another. Many traders who invest in the stock market try to create their own stock trading strategies that help them decide what stocks would be best to buy and when. In most cases, once people discover stock trading strategies that work, they stick with them for constant success. While some traders plan out for their strategies, others look at the common once and get used to use them. 1.1 Breakouts Strategy Breakout strategy is based on a technical analysis. It is the movement of the stock price out of a defined level of either support or resistance as the volume increases. A breakout trader indulges in long position when the price of the stock breaks above the resistence or even creates a short term position in the event that the stock breaks below the level of support. Volatility increases when the stock trading is above the price barrier. In addition, the prices are in the direction of the breakout. The importance of breakouts is that as the setups are the beginning points for increase in future volatility, as well as swings in large price. Besides, it is also the starting point for majority of the price trends. The two basic elements of this stock trading strategy is a support or resistance. A breakout is a price movement through an identified level of support or resistance, which is usually followed by heavy volume. A breakout occurs when prices exceed previously determined support or resistance levels. The investors use breakout strategy while taking position within the early stages of a trend. It can serve as the starting point for the movement of prices and volatility expansion. Proper management minimizes the chances of downsize risks. 1.1Swing Trading Swing trading is branch of the technical analysis strategy that attempts to capture gain in stock within a short period of time using trends and patterns. The use of such a strategy allows trader to acquire profits in short-time. It is described as a type of fundamental trading technique where the positions held are for periods longer or greater than a day. Besides, the fundamentals of the corporate may take relatively longer time to cause movement of prices that leads to profits that are reasonable. The time of investment usually ranges from 1 to 5 days. Swing traders generally trade the daily charts, and they often trade daily candlestick charts as well. Some swing traders use short time frame charts to choose the perfect entry or exit, while others employ long time frame charts to evaluate the general long term investment. It is an activity that encompasses the speculation of the financial market in which an asset that is tradable is held for several days with the aim of profiting from the changes in prices. The swing position is usually held longer than a day’s trading position though shorter than the strategy than involves buying and holding investment. The profits are sought by short selling or purchasing of an asset. Swing traders usually employ the use of mathematics objective rules in purchasing and selling is a method that is relatively common which traders use to minimize subjectivity, analysis that is labor intense and emotional care. The risks associated with swing trading that commensurate with the general speculations in the market. For an instant, risk related to loss in swing trading elevates the movement in trading range and sideways price in comparison to either the bear or bull market moving in a specified direction. 1.1 Trend Trading The Trend trading is an investment strategy that can be used in trading any commodity that has charts to show the price history. It is a trading strategy that aims at illuminating the acquire gains from the analysis of the momentum of the asset in a direction that is specific. When the stock is on the upward trend, the trend trader may be lured into long position. On the other hand, the downward trend of the stock also characterizes the trend trader’s short position. The assumption labeled on this trend is that the contemporary stock direction will prevail in future. In addition, it can be employed by traders for short or long or even intermediate period. The trend traders leverage the trends in the market though the observation of the contemporary market direction which is employed in making decisions pertaining making a purchase or selling. Furthermore, there are several techniques timeframes, and calculation that are often incorporated in the determination of the market’s general direction for the generation of forex signals. Besides, it involves the calculation of the current price in the market, channel breakouts, and moving averages. The Investors who use trend trading pay attention mainly to technical analysis more than fundamental analysis. Trend traders use technical charts and indicators to spot the up or down trend. Trend traders do not look to capture an uptrend before it begins, they first spot the going uptrend and use their technical indicators and price history to make sure that the uptrend has a strong momentum to keep driving the trend up, then, they ride on the trend. Moreover, trend trader often attempts to speculate the down trend before it begins by using the technical indicators. Trend trading is a forex strategy that the majority of the traders of different levels of experience often employ. It is also usually followed due to the fact that it is simply for the purpose of identifying and trading. Moreover, the trends that are strong are capable of bailing purchases and sales rules that are perceived to be imperfect. 1.1. Retracements Retracements are based on a fundamental analysis. The two basic elements of this stock trading strategy is a support or resistance as with break outs. However, this strategy requires a slightly different skill set and revolve around the trader identifying a clear direction for the price to move in and become confident that the price will continue moving in. This strategy is based on the fact that after each move in the expected direction, the price will temporarily reverse as traders take their profits and novice participants attempt to trade in the opposite direction. These pull backs or retracements actually offer professional traders with a much better price at which to enter in the original direction just before the continuation of the move. Therefore, retracements entail the temporary reversal of prices which takes place within a trend that is relatively larger. They don’t indicate any change whatsoever to the larger trend. The reversal of prices both the traders and investors often have a challenge in decision making. However, they can opt to hold during the entire sell off which may consequently lead into relatively large losses especially if the retracement is the reversal of the larger trend. If the prices recover, traders and investors may either buy or sell. It may lead into wastage of money on spreads and commissions. Moreover, opportunities may be missed due to sharp recovery of the prices. Permanent sales due to price recovery may also lead to missed opportunities. 1.2. News-Based Trading In News-Based trading the main focus is on the companies’ recent news. News-Based trading is part of the fundamental analysis, which does not rely on the technical indicators. Recent news can give the traders a clear idea about a company’s intentions in developing its business. News can be determined by watching closely TV news, newspapers, or Magazines. Once a piece of news is released, the intended market would start analyzing the next step of the company and its consequences in which the trader would determine his next steps. If good news has been released about a company, the first taker to buy some stock would achieve higher profits than other. In a summary, News-Based Trading is an effective way to achieve high profits in stock market trading. The efficiency of the market is dependent on the availability of information. The accessibility of this information has been made easier due to the availability of numerous channels of dissemination of information. Traders and investors study the reception of the announcement on various stock markets in the various news channels and employ the information obtained in making appropriate decisions (Brigham and Joel 52). The news-based trading strategy is a method of trading currencies, equities, and instruments of finance in the financial market. For an instant, reports on economic news usually spur moves in the market on short term basis thus creating opportunities for the traders. Announcements such as corporate making profits, rumors concerning merger, management change are some of the events that are likely to cause the movement of the share prices of the company either upward or downward. For an instant, financial analyst are able to analyze and provide insights through the various news channels. This in turn can prove as a technique of informing the potential investors in the appropriate investment avenues. Furthermore, these news based channels inform investors in the trends and projections on the future lucrative stock markets (Covel 134). 2. Selected Companies Amazon.com Inc. The first company that was chosen is Amazon. The reason why Amazon was chosen because it is a company that frequently is heard on the news; besides, new products usually released and Amazon is big market for those products to be sold off. This corporate has for quite sometimes been one of the greatest stock for investors who invest for long term benefits. Unfortunately, despite the fact that the company has providing its investors with significant profits, its profits have slightly declined in the recent years. One of the most affected segments of the corporation has been on the performance of the retail stock which has relatively underperformed in the past 2 years. In the US, Amazon has dominated the domestic sales of the e-commerce. The market place business for the company has had significant growth as it provides other retailers with the platform of selling their goods on the company’s website. Amazon ability to maintain its position as a leader in the e-commerce may result not only into the massive growth but also riding in relation to online sales growth. There is also an anticipation of an increase in the company’s bottom lines due to the introduction of new lines of products such as the Fire Phones and Kindle Tablet. The anticipation alerted numerous investors who were interested in long term investment strategies to inject their investments into the corporations (Brigham and Joel 52). Apple, Inc. Apple is the second company to be selected, which is due to the fact of Apple Watch released in 2015, which is considered the first smart watch. This is considered big hit for apple especially it will strengthen apple market on the watch industry. Also, because of the recent news about iPhone 6 plus release. Apple is targeting the smartphone market with a new edition from its essential device with a highest camera’s quality for a cell phone. This is in my opinion will sharpen apple profits in the next quarter. The company had apparently shattered sales of previous iphone. The models of iphone 6 Plus and iphone 6 accounts for the 20% usage of the all iphones. This is an indication that individuals have been upgrading the versions of the iphones. Moreover, the company’s suppliers are attempting to catch up with the high demands of the new iphones. There is also anticipation that the rebound of the ipad is likely to be launched. The return in terms of growth of the line’s product referred to as ipad in 2015 is likely to erase the concerns of the investors concerning the stocks of Apple. In addition, the launching of the apple watch in the market and the sales of this product will span widely. The other encouraging factor is that the company is often capable of luring the investors into injecting or rather investing into the company due to huge annual and quarterly profits that the company often realizes. In addition, the growth in the short earnings has the potential of resulting into the appreciation of the prices of the stocks. There are also several or numerous catalysts for the delivery of growth in terms of plenty earning in the year 2015. The catalysts will not disappear in 2016 while Chine will be moving towards launching LTE Smartphone is expected to gain steam in 2 years to come. Moreover, 2016 is projected to be the first year full of Apple Watch sales, as well as the rumored ipad. If the investors will be relatively comfortable with the company’s profit growth trajectory, the stock has a higher probability of rising in future. The Amazon.com Inc has diversified its online sales platforms. This has enabled the company as well as other companies to sell their products online and it is still expanding its online funnels thus promising to boost and increase the volume of the profits of the company. AT&T, Inc. AT&T is involved in the technology industry. The name of the company stands for American Telephone and Telegraph Company. It provides wireless and wire-line telecommunication services and equipment. It has been a strong competitor among the other telecommunication companies in the USA. The number of its costumers has been growing up with no stop. Besides, the telecommunication sector has been significantly growing. The phenomenon has proved to be attractive to the investors into the company as it promises the returns of investments to the investors. Exxon Mobile Corporation Exxon Mobile has been chosen because of two reasons. The first reason is because of the recent news about war between Saudi Arabia which is considered or rather perceived as one of the biggest oil source, and the terrorists in Yamen. Second, is because of the agreement between Iran and USA and the possibility of returning Iran back to the international oil market. I believe these two reasons are enough to effect on the oil price as well as Exxon Mobile market. Work Cited: Brigham, Eugene F, and Joel F. Houston. Fundamentals of Financial Management. Mason, OH: South-Western Cengage Learning, 2009. Print. Buehler, Stephanie, and Kacy Kohut. Stock Market Simulations. Westminster, CA: Teacher Created Materials, Inc, 2000. Print. Covel, Michael. The Little Book of Trading: Trend Following Strategy for Big Winnings. Hoboken, N.J: Wiley, 2011. Print. Kuepper, Justin. Retracement Or Reversal :Know The Diference. Web on 15th June 2015 Mayer, I.S, and Hanneke Mastik. Organizing and Learning Through Gaming and Simulation: Proceedings of Isaga 2007. Delft: Eburon, 2007. Print. Read More