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Stock market simulation

ESTHER GASKIN

BUSI306 - Business Finance 1

Game Name: Labrat

Trading on the stock market simulation required an analysis of the risk that one is willing to take in order to generate returns on investment. The decision was made to invest in four companies: AT&T, Target Corp, Direct TV and Merck & Co. Inc. due to being risk averse. The stocks were chosen from different sectors of the market and this was done to accommodate a diversification of stocks. Although the diversification is very narrow in scope, total return of 2.26% has been attained from the initial purchase of stocks.

STOCKS

Target Corporation is one of the world's premier retailers that is committed to creating the ultimate shopping environment through its innovativeness and high quality (Target, 2010). It stands on its promise "Expect More. Pay Less" (Target, 2010). Target Corp. stocks were chosen due to its rapid rise in income during the period (Mallas, 2010). Income rose by almost 50% to $1.24 during the quarter (Mallas, 2010). Growth within in the company is evident by the rapid surge even in this period of the economic recession. Additionally, analyst considered the stock a very strong buy (SmartMoney, 2010). The company's P/E ratio is as follows:

The decision was made to buy an additional 3,000 shares in Target Corporation (TGT) stock in 23 Apr, 2010. This was in an effort to lower the average costs paid for shares as the market price of Target stocks dropped significantly. In maintaining consistency in the goal to maximum returns, purchasing of additional stocks of the company facilitated higher returns on investment when the price of stock rose as costs were reduced

DirectTV is involved in providing satellite television capabilities throughout the United States. The company is highly technological in focus and is committed to "the delivery of a seamless viewing experience" (DirectTV, 2010). DirectTV's presence in Latin America is also one that is dynamic. DirectTV was chosen as an ideal stock due to its innovativeness. News dated Feb. 26 highlighted DirectTV's newest HD receiver and is smaller with high speed than past models (Drawbaugh, 2010). This news will particularly impact the technological savvy individuals that are always ahead in area of innovation. The ability of the company to introduce new products that will enhance performance of its services is a stock that is worth investing in. The P/E ratio for DirectTV is as follows:

In terms of revenue, AT&T is the biggest telecommunications company serving the nation with its high speed 3G network (AT&T, 2010). AT&T service was chosen based on industry news which highlighted that the company was rank top of PC world's "3G network tests" (McKee, 2010). The article also emphasized that as customers continue to grow so must the company (McKee, 2010). The growth of a company is usually reflected in the healthiness of a company; hence, this stock was chosen with a positive outlook towards future growth and profitability.

Merck & Co. Inc is a company whose aim is providing products that contribute to a healthier society (Merck, 2010). Their products include vaccines, consumer prescription products, and animal products (Merck, 2010). Merck was chosen because it was strongly recommended by analysts (SmartMoney, 2010). Additionally, Merck's collaboration with Nycomed in its co-promotion agreement with specific countries outside the U.S. was a perfect fit with Merck's goals (Merck, 2010). This is an opportunity for Merck to expand operations and should have a positive effect on investments and returns. The P/E ratio for the company is represented below:

From the initial trading on the stock market, the returns on investment has fluctuated with returns as high as 3.25% to as low as 1.37%. From the commencement of trading, annual percentage yield can be calculated as follows: APY = (1 + % month earnings) - 1 (Gitman, 2009).

Based on the calculation above, the percentage average return has been highest in the second period dated Mar 26 - Apr 25 of 24.6%. Throughout the period, TGT (Target) has done exceptionally well as compared to the other stocks in the portfolio with percentage equity of 33% compared to T (AT&T) with percentage equity of 7.65%. DTV (Direct TV) also contributed to the returns experienced by the portfolio although not as significant as that of TGT. As to date, the total returns on investment are at 2.26% with a total equity of $1,022,599.95.

Many factors influenced the value of the portfolio. Firstly, the ability to take on more risk since this can be a key determination on the amount of returns that is generated. Although the stocks that were chosen were limited due to the attempt to limit risk, the stocks were from different industries which spread risks, though narrowly, over the range. Also, the volatility of the market affected the portfolio significantly. Due to fluctuations in the market price of stocks the return on investment showed significant decline resulting in returns as low as 1.35% and rose as high to over 3%. For example, to date DTV has showed a decline in market price for the day although the company has generated returns for the portfolio over the period. Lastly, external and internal factors can significantly affect the market value of companies especially those that are more sensitive to changes in the marketplace. For example, a pharmaceutical company such as Merck is less likely to be affected by day to day events occurring as most of their investments are on a long-term basis. However, companies in the consumer cyclical sectors may be more sensitive to events such as changes in consumer tastes which will impact demand and profitability of the company.

Given the small number of stocks purchased, investing in Target Corp. (TGT) was a good decision. Additionally, the stocks chosen was ideal as it has proven that one can still make a return by strategically choosing stocks well. DirectTV (DTV) has also done well in generating returns for the portfolio. Although AT&T (T) has generated returns as well, the percentage equity is the lowest which indicates that there is potential to do better on returns of investment. Merck (MRK) is presently generating a loss for the portfolio although the percentage equity is on par with DirectTV (DTV). As compared to classmates, the portfolio now stands at the 11th position. This can be attributed to number of factors. Portfolios that are performing better may be attributed to pure luck such as investing in the right stock at the right time. However, it can also be due to carefully and strategically studying the market before choosing stocks as well as listening to reviews and insights from persons such as analysts and financial gurus like Warren Buffet. The diversification of stocks can also contribute to a well - performing portfolio. In terms of poorly performing portfolio, the combination of stocks may be a major contributor. According to Gitman (2009), in order to reduce the level of risk, combine assets with a negative or low positive correlation. However, portfolios may not have followed this principle resulting in losses on all stocks during difficult periods in the market.

Changes to be made in the continuation of the game include monitoring the market more carefully. A lot of time has not been invested in analyzing stocks and the impact of events on the market value of stocks in the portfolio. Additionally, lack of monitoring also contributed on missed opportunities for potentially viable stock options. Hence, the market will be monitored more frequently and more in - depth. Also, the portfolio can be a bit more diversified. The level of diversification within the portfolio is very narrow and can be a contributor to the level of returns that have been generated. The greater diversification leads to the potential for greater returns while limiting risks. As such, more companies within different sectors will be evaluated as potential investments. Finally, it is recognized that the time value of money is very important to any investment. As such, the cash that has not been invested WILL be invested as it represents money that interest can be earned on. The money represented as cash balance on the portfolio represents money that could have been invested and generating returns. Hence, investments will be made with that cash that is not utilized presently.

Overall, there is improvements that can be made in order to achieve maximum returns on investment. Being risk - averse, it is essential that the portfolio is properly managed and decisions are strategically made to avoid incurring any loss.

References