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THE BULLS, THE BEARS, AND THE PIGS
The Bulls
A bull market is a stock market with rising
prices over an extended time. Buying on margin can increase gains in a
bull market.
The Bears
A bear market is a stock market with
falling prices over an extended period of time. Selling short can
increase gains in a bear market.
The Pigs
A pig is a greedy animal. Stock
buyers who try to make every last cent of gain on an investment may end up
with losses.
MARGIN PROBLEMS
The amount of collateral that the investor must deposit to
open a margin account to buy stock is called the initial margin requirement.
The initial margin requirement must be 50% (one-half) of the total value of
the stocks being purchased or sold short. This means that to make a
$10,000 stock purchase on margin, the investor must put $5,000 worth of
collateral into the margin account.
The actual amount of ownerwship the investor has in the
account is called the equity. It is determined by subtracting the debt
(which is owed the brokerage firm) from the value of the stock (what is
owned). The following is a sample margin account:
Current value of stock purchased
$10,000
Debt (money owed to broker)
- 5,000
Equity (amount owned by investor)
5,000
Suppose the price of stock increases. The market
value of the stock will rise, and so will the equity.
Current value of stock
$11,000
Debt
-5,000
Equity
6,000
Suppose the price of the stock falls. The market
value of the stock will fall, and so will the equity.
Current value of stock
$9,000
Debt
-5,000
Equity
4,000
The Stock Market Game also allows you to buy stock on
margin. In the Game, the computer will act as your broker and lend you
part of the money needed to buy stock. Since the initial margin
requirement in the game is 50%, you can borrow up to one-half of the value
of the stocks being purchased or sold short.
This means that in the beginning of the Game you may buy
approximately $200,000 worth of stock (less the broker's fees). One
hundred thousand dollars will come from your beginning cash balance, and the
game will lend you $100,000. In this case, you have borrowed the
greatest amount possible because of the 50% margin requirement ($200,000
worth of stock x 50% [.5] = $100,000 loan). The game would "hold" your
$200,000 worth of stock as collateral (security) for the $100,000 loan.
Of course, you do not have to spend all of your cash
($100,000) the first time that you buy stock. However, when you are
buying stocks in The Stock Market Game, you may eventually spend all of your
cash ($100,000) and need a loan. If you reach a point where you have
zero cash, the game will automatically lend you money.
On your portfolio report, the "ending balance" shows
whether you have borrowed money to buy stock. If the ending balance is
less than zero (a negative number), then you have a margin loan. It
will be equal to the amount shown. You would have to pay interest on
that amount (your margin loan). The interest on your loan is deducted
from your opening balance each week. (The Player's Manual explains how
the interest is calculated on margin accounts.)
Now see if you understand this by completing the problems
on the next page.
Now complete the following
Short Sale problems.
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