Annual High School Stock Challenge
Welcome to the College of Business Annual Stock Challenge for High School Students
The purpose of the Stock Challenge is to introduce high school juniors and seniors to
the world of investing. Finance affects everyday life in significant ways. Whether
you are in the market for a home or auto loan or you are saving for a big expense
like college education or for retirement, you need financial knowledge to make sound
decisions. By participating in the Stock Challenge you will be taking the first step
toward acquiring the necessary knowledge. On this site, you will find some basic
information on stock investing to help you take part in the Challenge. In addition, you
will also find links to some interesting articles and historical data to help you
explore the world of investing. When you are ready, register for the Challenge and learn
by investing a hypothetical sum of $1 million. Learn how a myriad of factors such
as government policies, geopolitical conditions, and investor fear and greed, to name
a few, affect stock prices. Cash prizes will be awarded to the top three participants
with the highest terminal portfolio values. We hope you will find this experience
both interesting and rewarding.
Dr. Antoinette Phillips, Interim Dean
Dr. Rakesh Duggal, Professor of Finance
Rules of the Challenge
The Stock Challenge will commence on June 1 and end on July 3. Each participant will receive $100,000 in play money to be invested in stocks, ETFs, or REITs* that are traded on U.S. exchanges. Your cash balance will earn interest and you can borrow additional funds at a specified rate to increase your buying power. Each buy or sell order incurs a $10 broker's fee. You can learn more about the rules by first registering for the Challenge, then clicking on Rules and Administration.
* Exchange traded funds (ETFs) are portfolios of securities that track specified indices, such as the Dow Jones Industrial Average or S&P 500. ETFs are put together by investment companies such as Vanguard and are traded on exchanges just like stocks. Real estate investment trusts (REITs), which are also traded on exchanges, invest in commercial or residential real estate and pass on at least 90% of their income after expenses to avoid paying corporate taxes. Investors pay taxes on the distributions received from these REITS.
Common Stock: Risk and Return
When you purchase a firm's common stock, you become a part owner of the firm. Suppose you buy 10,000 shares of McDonald's. Since this fast food company has about one billion shares outstanding, you become a 0.001% owner of the firm. Becoming a McDonald's part owner offers you many advantages: you receive voting rights to elect the board of directors; you also have a right to receive a dividend if and when the board decides to make a dividend payment (the company currently pays $3.08 per share annually in dividends); and, in general, as a part owner of the business, you partake in McDonald's all future growth and profits, which flow to shareholders in the form of dividends and a higher stock price. However, as a part owner, you also proportionally share the risk of the business. If, for example, Wendy's or Burger King begin to offer better menu choices at attractive prices, McDonald's sales and profits will slump, dragging its stock price down. Similarly, if government regulations concerning the fat and sugar content of these restaurants' menu offerings dampen the firms' sales and profits, then the expected lower future profits and cash flows will result in lower current share prices of the affected firms.
How have stock investors been rewarded throughout history? Take a look at the following table:
US Real Asset Class Returns (% Per Annum)
|10 Years||20 Years||50 Years||84 Years|
|Inflation Protected Bonds||5.8||-1.3||6.7||N/A||N/A||N/A|
Source: Barclays Capital Equity Gilt Study 2010.
Stock investors received an average real annual return of 6.6% (or approximately 9.6%, assuming a 3% annual inflation rate) over the 84-year period ending in 2009. However, investors face tremendous volatility over shorter investment horizons: investors lost as much as 39% of their investment values in 2008 and gained a nearly 29% return in 2009. Even a 10-year investment period is not long enough for investors to be assured of a positive return: investors received a negative 2.2% return in the 1999-2009 period. Read the following for more detailed information on the historical stock market returns and the economic and geopolitical factors currently influencing the stock market returns.
How to Select Stocks
In general, an investment is desirable if it promises at least the required return based on the investment's risk. For example, suppose you come across an investment opportunity that promises you just one cash payment of $110 next year and nothing after that. Assume given the investment's risk, you require a 10% return on investment. What price should you offer so as to receive a 10% return? Answer: $100. How do we find it? We calculate the fair value or present value as follows:
Fair value or present value=Cash Paymentn/(1+r)n
r=risk-based required return, adjusted for n, as defined below
n=A specified time period when the cash payment will be received (n may be measured in days, months, years, etc.).
Stock analysts spend substantial time in estimating a firm's expected sales, costs, profits, and cash flows for the future quarters/years and then attempt to estimate a fair value of the firm's stock. You will agree that predicting a firm's future sales and cash flows is a very difficult endeavor and consequently a stock's fair value estimates based on these predictions can be very unreliable. For example, in 2012, as the Apple stock price was surging in the wake of the euphoria surrounding the iPhones and iPads, some analysts predicted that Apple would soon become the first S&P 500 stock to hit $1,000. The analysts overlooked competition, especially from Samsung, and overestimated Apple's future sales. In early 2013, when Apple reported disappointing sales numbers, the stock price plunged very rapidly from the $700s to the low $400s. In general, stock price forecasting is quite treacherous. Read the following on the success rates of various prediction models.
In addition to the present value approach, stock analysts also use many comparative measures, such as price to earnings (P/E) ratio, or price to book (P/B) ratio, or price to cash flow (P/CF) ratio. The rationale behind these measures is as follows. Suppose you want to buy the right to operate a gas station from a franchisee. The property belongs to a gas company but the franchisee operates it and pockets all profits after expenses, which include an annual fee to the gas company. You talk to a number of experts and past owners and gather that in general buyers pay three times the annual profits after taxes, which means the price to earnings (P/E) ratio is 3. Armed with this knowledge, you know what a reasonable offer for a gas station with an after-tax profit of $100,000 will be. Yes, you are right, it will be 3*$100,000=$300,000. The other measures (P/B and P/CF) are applied in a similar manner.
Researchers and investors are always looking for a get-rich-quick formula. Read the following article for one such endeavor.
Here are some lessons from the stock market history:
- Invest for the long-term.
- Diversify across three main asset classes, stocks, bonds, and cash.
- Diversify within each asset class following the precepts of the modern portfolio theory. If you are unable to diversify because of capital constraints, invest in diversified mutual funds or ETFs. Pay close attention to mutual fund costs. ETFs, in general, have lower costs.
- Invest using dollar cost averaging (e.g. invest $x every month/year, regardless of the market volatility)
- Above all, be a student of investing and do your homework before making an investment.
The College of Business has two labs, a finance lab and a Bloomberg lab, dedicated to financial learning. The finance lab is equipped with data boards, a Bloomberg terminal, 45 computers, and the Financial Trading System. The data boards display current data from the financial, capital, and foreign currency markets to provide a real-life context for financial learning, and students learn complex relationships by simulated trading and model building. The Bloomberg lab is equipped with 11 terminals and students use Bloomberg for numerous class projects.
Bloomberg Lab College of Business Lobby