Using the Stock Market Game in the Social Studies Classroom

Allen C. Cox

The Stock Market Gameª is a ten-week simulation of the New York, American, and NASDAQ markets that is held three times a year (fall, spring, and summer). It began in 1977 in New York and has grown to involve over 750,000 students, teachers, stockbrokers, investment professionals and other interested adults. It is actively played in all 50 states. The game is sponsored nationally by the Securities Industry Association. Each state has one or more state coordinators who administer the game in their home states. There are two versions of the game. One is named SMG400 and is played with paper scan sheets, using a pencil, a stock code booklet and the U.S. mail; the other, SMG2000, is played using a computer and an Internet connection.
The purpose of the Stock Market Game is to help students (fourth grade through adult) understand how financial markets work within the free enterprise system, and to learn about the basic economic principles that impact the stock markets. The Stock Market Game, however, is much more than a game. When it is used effectively, it teaches much more than just how to invest. In this article, I will describe:

1. How the Stock Market Game can be used to motivate students to learn about publicly-traded American and foreign corporations by researching the investment opportunities that a greater knowledge of economics allows, and

2. How social studies teachers can use the Stock Market Game to create a positive learning environment encouraging students to employ cooperative learning to solve real-world problems using critical thinking skills and technology.

SMG400 (The Paper Version)
The paper version of the game is called SMG400. Typically, teams of 4 to 6 students make investment decisions and then enter those decisions onto a machine-read scan sheet using a pencil-much like taking a standardized test. Each team starts with a hypothetical $100,000, and the object of the game is to invest in stocks (listed in a code book) over a ten-week time frame in the hope of making the team's portfolio of stocks appreciate in value. The game allows players not only to buy and sell shares of stock that they predict will go up in price, but also to short-sell and short-cover shares that the team feels will decrease in value during the game. A broker's fee of two percent (2%) is charged for each transaction, and players may also buy on margin (borrow additional money for which they must pay interest). When a transaction is made on the scan sheet and mailed to the processing center, the players are given the next day's actual closing price from the stock exchange on which the stock trades. Because of this, players can check the newspaper or other sources of stock information to see how their trades did in the real stock markets, and keep a record of their portfolio.
Once a week the game coordinators also send a team portfolio statement, classroom lessons and other pertinent information to each team so that records can be checked for accuracy and team rankings within their competition category can be shown. At the end of the ten-week session, winners are declared and the winning teams are recognized for their achievement. (Each state coordinator chooses how to establish winning categories and awards)

SMG2000 (The Internet Version)
In the Fall of 1996, the Securities Industry Foundation for Economic Education (SIFEE), instituted a second version of the Stock Market Game. This version uses the Internet to make stock trades instead of scan sheets that must be mailed. Named SMG2000, the Internet version of the game has many features that are not available in SMG400 (the paper version). Teams still begin with $100,000, but all transactions are done on-line using the team's computer, which is connected to a modem and has access to a Web Browser such as Netscape Navigator or Microsoft Internet Explorer. Players who make trades in SMG2000 get the same day closing price instead of the next day's, as is the case with SMG400. SMG2000 also allows players to earn dividends from the stocks they own and interest on their unspent cash balances. Porfolio updates are recorded daily and teams may see where they stand whenever they log on to the web site for SMG2000.
The best feature of SMG2000 is the opportunity it affords students to do on-line research about the stocks in which they have an interest. Students can access "hot link" buttons on the screen that will lead them to other Internet sites where they can look at (and print out) annual reports, recent articles that have been written about companies of interest, and other information that investors need to make prudent investment choices. With SMG2000, players may invest in any publicly-traded common stock that has a ticker symbol and is priced over $5.00 per share. In SMG400, in contrast, players are limited to the stocks that are listed in a code booklet of available stocks. Because of SMG2000's superior capabilities, most states are hoping to gradually phase out SMG400, and use SMG2000 exclusively. Of course, this phase-out will depend on how quickly schools can get the needed computer hardware and access lines that are needed to play the Internet version.

A Unique Teaching Experience
Unlike most classroom simulations, the Stock Market Game creates a situation in which the teacher does not know the outcome in advance. No one can consistently predict what is going to happen from day to day in the stock exchanges over a short-run time period. Therefore, teachers who use the Stock Market Game can show how the stock markets usually react to the changes in microeconomic as well as macroeconomic happenings that students see and hear about each day in newspapers, at home, on TV and radio, and more and more often, over the Internet. Most social studies teachers want their students to follow current events in the news. The Stock Market Game encourages students to follow those events from the vantage point of how those events are affecting their own personal investments in the game, instead of from a position of being unaffected by those events.
Savvy investors must stay abreast of microeconomic changes affecting the companies in which they have invested. Teachers who use the Stock Market Game can teach how significant microeconomic changes can affect their students portfolios. These changes include, but are not limited to analysis of:

Additionally, Stock Market Game competitors will be motivated to analyze important macroeconomic changes which could impact their investments. Some examples are:

Since students who are competing in the Stock Market Game have a natural interest in the performance of their stocks and stock markets, teachers can use the game to teach many basic economic concepts while taking advantage of the students' desires to compete with their peers throughout the state in which they live. Recently, for example, investors have been closely watching the monetary policy actions of the Federal Reserve for any sign of changes in interest rates. Typically, Stock Market Game players are more motivated to know why the actions of the Federal Reserve are affecting their portfolio than students who are not competing. Additionally, game players are more likely to keep up with other news that could affect the stock markets or give them a clue for finding a winning stock pick. Often, students can get good stock picking clues just by "going to the malquot; and observing customer behavior and/or talking to store managers and sales people who could tell them about "what is hot and what is not."

A Gradual Increase in Sophistication
Elementary Level
For elementary students, teachers use the Stock Market Game to reinforce math skills such as converting fractions to decimals, and visa versa. The game also is a good opportunity to study businesses in the school's community and to discuss the impact those businesses have on the local economy. At the elementary level, teachers usually keep the game simple and ask students to concentrate on the stock of companies that they know something about and can relate to easily. The most successful elementary school teams often concentrate on stocks in the toy, car, fast food, and clothing industries; or they get tips from their parents or relatives who work for successful companies. Playing the Stock Market Game also gives the elementary school teacher a chance to talk about the virtues of saving and investing over long periods of time which allows for interest and dividends to grow as they are reinvested over and over again for many years.

Middle and Junior High Schools
In middle and junior high schools, the teacher can use the game to motivate students to do more sophisticated research and to keep accurate records of their team's transactions, sometimes using simple computer spreadsheets. At the middle/junior high school age, students are often taught about other countries of the world, and the Stock Market Game can be used to motivate students to seek additional information about the economy of the countries that they are studying. By middle school, students should be seeing how the world economies are interdependent on each other, and that investment opportunities are created when those inter-relationships change. The current turmoil that is occuring in European countries because of the impending economic union of those countries can be discussed in class with an eye toward the investment opportunities that are being created for companies with international markets which are headquartered here in the United States.

High School and College
High school and college students and adult players should be able to conduct even more advanced stock selection research. If these students are novice investors, the teacher should begin the simulation in a simple manner-buy and sell stock in companies that they know something about. For example, many high school and college students can predict whether Nike, Fila, or Reebok will have the hottest selling sneaker on the market, and they can take advantage of that insight; while adult players can take advantage of their years of observing successful and unsuccessful companies. If these students are Stock Market Game veterans, they should be able to increase the sophistication level of the research they employed in earlier games to make stock selections that are justifiable using higher order thinking.

Classroom Management: Some Important Points
1. Students must keep and maintain their own set of stock records between the portfolio statements that are generated by the SMG400 game. This independent record keeping must be done to allow the students to check their records against those that the game provides, just as an investor in the real world should do. SMG2000 updates the portfolio daily so that record keeping is done on-line and may be printed out at any time.

2. Let the students do their own stock selection. Teachers should not fall into the trap of allowing their students to seek their advice or the advice of a broker or other adult in place of doing the students' own thinking and selecting. The game is not about being able to fill in a transaction sheet or pushing keyboard buttons; it is about using market and economic knowledge to make stock selections and using the simulation to reinforce the validity of that knowledge as it relates to the real world.

3. Because problems with the Internet can and probably will occur, and most of those problems are out of the control of the Stock Market Game administrators, teachers must be flexible enough to provide alternative classroom activities when the Internet is inaccessible. Many written lessons have been developed for the Stock Market Game (excerpts from one such lesson accompany this article), and teachers must be able to go to an alternative if the Internet activity cannot be done when planned.

4. Do not overemphasize the money winning and losing aspects of the simulation. In a ten-week time frame it is possible for a team to get lucky and make a lot of money, while another team which has spent much greater time and effort in quality research may lose money. Teachers should reward quality thinking to a much higher degree than portfolio appreciation that has occured without quality thinking.

Conclusion
The Stock Market Game is an educational experience that students never forget. Students who play the game become excited about reading the newspaper to check their stock portfolio and search for clues that might lead to a new investment. They are excited when they receive their portfolio updates of how they are doing in the competition in the region. Students who have played in elementary or middle school often go on to their next school and ask the teacher to let them participate again. More importantly, when taught effectively, students become more economically literate investors who have a better understanding of our economic system.
For more information about the Stock Market Game (either the paper or Internet version), contact the Securities Industry Foundation for Economic Education at 120 Broadway, New York, NY 10271 (tel.: 212-618-0519) or visit their Web Site at http://www.smg2000.org/ n

Allen C. Cox, Ph.D, is the Social Studies
Department Chairman at High Point High School in Prince Georges County, Maryland, and coordinator of the Maryland Regional Stock Market Game.

Strategies for Stock Selection

The National Council on Economic Education has published a curriculum guide with 24 classroom-tested lessons written especially for the Stock Market Game. Excerpts from Lesson 14, Activity 1 follow.

Go with what you know. That is the advice of Peter Lynch, former portfolio manager of Fidelity Magellan Fund. "During a lifetime of buying cars or cameras, you develop a sense of what's good, what's bad, what sells, and what doesn't. If it's not cars you know about, you know something about something else, and the most important part is, you know it before Wall Street knows it."
THink about what you know. What product do you really like? What is popular among your friends? Who makes it? Do you think it will continue to be popular? The point Peter Lynch makes is that stock tips are all around us. Often, we might spot a good company before it is well known. He does caution, though, that you have to do your homework. If you can't explain what the company does, then you shouldn't buy it. In addition to knowing what the company does and whether its products or services are of high quality, you also need to know how the company is doing, the financial position of the company, and other important information.
Markets: Current and Future
A product must have customers today and even more tomorrow or it isn't growing. When selecting a stock, you must consider the markets available for the product/service. Does almost everyone already own one? In the early phase of development, a company first puts a product or service on the market and its sales are expected to grow rapidly because not everyone has what it sells. In the late phase, a company's product or service has been on the market for a while, and its sales are no longer expected to grow rapidly. The stock of a rapidly growing company is more likely to increase in price, especially in the short term of The Stock Market Game.
Global markets are important as well. Examine prospects for U.S. companies in foreign markets... Remember that the product or service must be appealing to businesses or consumers in these countries.

Demographics (population) also affects current and future markets. Will a large percentage of the population want this product? Imagine that your age group was the largest age group in the population. Companies that produced what you bought would do very well. In the 1950s and 1960s, the baby boomers were teenagers, and there were more of them than any other group. Record companies, fast food restaurants, and other companies that targeted teenagers did very well. Because many products/services are targeted to a certain age group, you have to consider who will buy the product and the number of potential customers when you make a judgment on current and future markets.

Economic Cycle
Is the economy booming or slowing down? The performance of many stocks will be affected by economic cycles. Buyers of stocks need to know which ones and why. When the economy is growing, most people who want to have jobs have them, and people and businesses are spending money. Individuals might decide to purchase a new car, and businesses might decide to buy some new machinery. When the economy slows down, more people than usual are out of work or worried about being out of work, and people and businesses cut back on their spending; they are not likely to spend money on items or services they do not absolutely need. They are not as likely to purchase a new car, build a house, take a trip to Hawaii, or-in the case of a business-build a new plant or buy new equipment. But even in bad economic times, people still buy some products. They brush their teeth, eat cereal for breakfast, take a pill for that awful cold, and heat their homes. They might be a little more careful about expenditures, but some items will be purchased despite the downturn.

Avoid the Obvious Risks
Beware of front-page stories. Of the 20,000 stocks publicly traded, only two or three will be found on page one. This year's winners are unlikely to be next year's winners. Most stocks don't get headlines, and when they do, everyone else knows about it as well, including Wall Street. Stick with the boring stocks. You will have to work a little harder, but your chances of picking a good stock are much better.

Current Industry Condition
To what industry (group of companies that produce or sell the same kind of product or service) does your potential stock selection belong? Industry classification includes transportation, automotive, food and beverage, retail/apparel, health care, entertainment, communication, utilities, financial, and several others. Will current events in the United States or other nations affect businesses in a specific industry? Is that industry in trouble? For example, when the Clinton administration was developing a plan for government-sponsored health care in 1994, there was speculation that prices would be regulated for some medicines. As a result, the pharmaceutical companies experienced a sharp drop in their stock prices. Merck, a strong company with an excellent record of growth and income, dropped right along with the others. A given company might be a good company, but a given time might not be a good time for its stock. (Merck later recovered.)

Changes in Technology
You also have to consider whether your selection will be affected by changes in technology. IBM, known as Big Blue, staked its growth on mainframe computers. But growth in personal computers surged, and companies producing personal computers clearly outdistanced IBM. IBM stock recovered later, too, but until it caught up to market technology its prices were affected.

Specific Stock Situation
Even if the markets, industry, economic cycle, and technology angles all check out, stock buyers still have to check the specific stock situation. If a particular company is in trouble or could be in trouble, then it is not a good choice.

Do Your Homework
Once you have a general idea about how your selection fares in each of these categories, it is time to use some common sense and do a little research. You should know what the company does and whether it makes good products/services. How is the company doing? What is the financial position of the company? What is the company debt (assets to liabilities ratio), earnings growth over the past five years, high and low prices for the year (stock tables)? What about dividend payments? Is the company in an early or late phase of development? Are new developments in progress? What other businesses does the company own? Is there diversity in the products it makes? Information can be found by writing to the company for an annual report, by looking at newspaper stock tables, by calling or visiting the business department at your city library, by calling an area broker, etc. The bottom line is that YOU have to do some thinking, some research, some more thinking, and then make a selection.

Questions for Discussion
What is Peter Lynch's advice for picking stocks?
Give an example of a company that you think has a growing market.
What is an example of a good stock to buy in a recession? Expansion?
Why should you beware of front-page stories?
Explain how changes in technology affect stock prices.

From Learning from the Market, Integrating the Stock Market Game Across the Curriculum (National Council on Economic Education, 1140 Avenue of the Americas, New York, NY 10036 (1-800-338-1192). Reproduced by permission.