How The Market Works!Ms. Zucchero

Pseudo Stock Market

Account Summary Terms:Available Cash – Amount of cash in your account available for trading

Withheld Cash – Amount of cash reserved as collateral for stocks you have sold short. The system will hold 50% collateral for the initial short sale value

Short Sales – Cash from any short sales you placed. The brokerage holds this cash in a special account until you cover your short sale

Commission – $5.00 per trade

Profit – This is the Account value minus the Starting Cash. If your current holdings have a gain but you lost profits in the past, you may still see a negative profit overall

Short Selling*Upon making a decision to choose a stock, you are “Taking a Position.” There are two kinds of positions you can choose from. A Long or a Short Position.

*Taking a long position means purchasing a stock thinking the price will rise

*The short position is a bit more complicated. When you short you sell the stocks and then buy them back when the price goes down, earning you a profit.

You Do not own any shares of XYZ stock however you tell your broker to sell short 100 shares of XYZ, you have carried out shorting a stock. In broker’s lingo, you have set up a

short position in XYZ of 100 shares. It’s also explained as ‘you hold 100 shares of XYZ short

Short Selling – Why?

You rely on the price of that stock going down, so you can then buy it back at a much lower price than you sold it at. The short sale of stock is a gamble that the price of that stock will go down.

Short Selling - ExampleMs. Zucchero goes into a short position, shorting 100 shares of company XYZ. She shorts it at $110 thinking it will decline to at least 85. At 85, Ms. Zucchero thinks that XYZ may not decline much further, if at all.

HOW DO YOU MAKE A PROFIT FROM BORROWED SHARES?!!?!?!?

Ms. Zucchero took the stock temporarily at $110 and paid it back at $85. You’ve made 25 per share in profit or 2,500. Ms. Zucchero sold the borrowed stock for $11,000 and purchased it again for $8,500.

$110x100=$11,000 – Borrowed stock

$85x100=$8,500 – Bought stock at a lower price

*PROFIT IS $2,500*

On the other hand, suppose the price of XYZ goes up to 125. Ms. Z sold the stock for 11,000 and now she wants to retreat from the position. Ms. Zucchero would have to go into the market now and purchase 100 shares of XYZ for 12,500. You would then be returning the loaned stock at $12,500. In this scenario, you’ll have a loss of $1,250.

Order TypesMarket Types – The simplest, orders will execute immediately

Limit Orders – Trade at your price (or better), you specify the highest price you are willing to pay for buy orders or lowest price you are willing to accept for sell orders

Bull vs. Bear MarketThe Bull MarketA bull market is when everything in the economy is great

People are finding jobs, gross domestic product (GDP) is growing, and stocks are rising Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up

Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued

If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook"

Bull vs. Bear MarketThe Bear MarketA bear market is when the economy is bad, recession is looming and stock prices are falling

Bear markets make it tough for investors to pick profitable stocks.

One solution to this is to make money when stocks are falling using a technique called short selling

Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market.

If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook"

Bull vs. Bear Market

Bulls make money, bears make money, but pigs just get slaughtered!

There are plenty of different investment styles and strategies out there

Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market

Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do not understand