Playing the Stock Market on a College Budget

Spring semester of 2006, FIN 323 – Fundamentals of Finance with Dr. Pawar…my roomate Adam and I are learning about making and managing investments. On our walk home from class the usual argument starts over who would be better at diversifying their portfolio and making smart investments. However, we both know that when it really comes down to it, we barely have enough money to pay rent and register this domain let alone drop some serious cash on a hot stock tip, so what did we do? We started the “Ultimate Stock Challenge”.

6 guys, $10,000 a piece, and 6 months to put the guys from Boiler Room to shame. How did we do it? It wasn’t by cashing in on a trust fund, It was all run through Investopedia.com‘s Online Stock Market Simulator.

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Through their program you can create an account and join any of hundreds of games (simulations) in progress, or, like in our case, create your own. By doing this you can set the time limit, starting cash, number of players and lots of other options. The simulator uses real time stock quotes so you are actually trading at market value (which can make you happy that its just a simulation when all your stocks tank and you are out 10 grand…or piss you off when your hot stock tip just tripled your money!). The one flaw I found is that the simulator will not let you buy penny stocks, that is, stocks worth below $1 per share. I just did a test purchase of 100 shares of “Intrepid Holdings”, a hot tip I got from the highly trusted RocketStockPicks.com, and the Simulator told me

“The Simulator does not allow stocks below $1 to be traded long or stocks below $5 to be traded short.  Stocks trading in this range are more likely to be subject to manipulation from stock promoters and can have erratic trading patterns.  For this reason we do not allow the trading of penny stocks in our game.”

This is good and bad…good because it forces you to do some research and find a valuable stock at a decent price before you invest in it, and bad because I told my roomate Adam about that website as a “confidential hot insider stock tip” hoping he would drop a couple grand on some bogus picks and put me in the lead of the competition. Needless to say, he didn’t buy it and neither did Investopedia.

So you might be wondering, “why should this matter to me, i don’t care about your stupid stock competition”. Well, you should, and here is why.

  1. Experience in the stock market is more valuable than you may realize. You will quickly learn that research pays off exponentially, and a insider tip from your friend in the competition about diversifying your portfolio by investing in Home Depot because summer is coming up and people will be buying lots of patio furniture unfortunately does not. It takes serious research and careful tracking to judge the value of an investment, and done correctly it will pay off!
  2. Sitting in your finance class, it is pretty hard to realize exactly what is going on without having any hands-on experience. So get involved and actually learn what is going on behind all this theory they are teaching you. What is a Debt to Equity Ratio, a profit margin, or a Quick Ratio? Well its a lot more than just a formula you ignored in class. Learning about and understanding these can pay off huge when they help you make an educated purchase.
  3. My professor told a story about a guy staying in a hotel in Las Vegas. He was in his room on the 20th floor, and noticed that the building had caught fire near the ground level. Before running for the stairs, he grabbed his laptop and quickly logged on to his broker’s website, and sold all the shares he owned in the hotel. It turned out that the stock value plummeted minutes after the fire was all over the news. True or not, the lesson of the story is that the market reacts almost instantly to any and all changes. What does this teach you? Learn to react with it and you will stay ahead of the game.

I hope this will help people get involved in learning about finance and give you a practical application of what you may have been learning in school. By no means is the Investopedia simulator the only one out there, I just chose it for the competition because it seemed to provide the most realistic experience. A quick search on google provided me with a ton of other options:

http://www.nationalsms.com

http://www.virtualstockexchange.com

Those are some, among many other choices. And with that, good luck and good trading!

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