Teaching Economics with a Stock Market Simulation

Teaching Economics with a Stock Market Simulation

Lopus, Jane

Most high school and middle school students are curious about topics that are consistently in the news, and would like to understand how these events relate to their lives now and in the future. The stock market is in the news daily, on radio, television, in newspapers, and in other print and online news sources. Capturing and applying student curiosity about the stock market can be a great way for teachers to introduce many important economic concepts in the social studies classroom.

Many teachers use the stock market to teach economics by having students participate in a simulation involving the current stock market and its day to day price changes. In a typical simulation, the teacher divides the class into teams of three to five students who are given a sum of imaginary money, say $10,000 or $100,000, to invest in stocks. After researching and choosing a portfolio, students trace what happens to the value of their stocks during the length of the game, usually corresponding to a school semester. In more sophisticated versions of the simulations students may buy, sell, short sell and short cover stocks and other financial assets throughout the duration of the game, pay commission to brokers, earn interest on cash held, and are credited for earned dividends. Students frequently become very interested in tracking the value of their simulated portfolios, and therefore become interested in current events and in learning more about the economic forces behind the changing values of their stocks. This excitement is often enhanced when the games are set up as competitions among teams who try to make the most capital gains.

HIGH SCHOOL LEVEL ECONOMIC CONCEPTS RELATED TO THE STOCK MARKET

The stock market provides a wonderful background for teaching about supply, demand, and price determination. Why did the price of a stock increase? Either demand increased, or supply decreased, or both. Why did the price decrease? Demand decreased, or supply increased, or both. Changes in demand and supply of stocks often relate to current events, so many students become more motivated to follow the news as well as to understand basic price theory.

In addition to concepts of supply and demand, because the stock market closely resembles a purely competitive market, it can be used to discuss different types of market structure. When discussing what a stock is, corporations and other types of business organization may be covered. Other economic concepts may also be addressed in the context of the stock market, including investment (both personal investment and macroeconomic investment), capital, capital gains and losses, economic growth, scarcity, decision making, and opportunity cost. As shown in Table 1, the first two Grade 12 Economics Standards in the California History/Social Science Standards may be easily covered using examples and applications about the stock market.

ONLINE STOCK MARKET SIMULATIONS OFFERED BY CALIFORNIA STATE UNIVERSITY CENTERS FOR ECONOMIC EDUCATION

There are many methods for conducting stock market simulations in the classroom, and there are many different simulations available for California teachers. Individual teachers often design their own projects, assigning students to choose and follow stocks for a period of time. There are also several published simulations available from organizations such as Social Studies School Service (www.socialstudies.com.) Some newspapers offer stock games for schools through their Newspaper in Education programs.

Several organizations offer online stock market simulations for high school students. Features of different online stock market simulations are reviewed in a paper by Lopus and Placone (2002), available online at http/ /people.clemson.edu/~dlplc/stockmarketgames.htm. The two largest online stock market simulations available for high school students are those offered by the securities Industry Foundation for Economic Education and those offered by Stock-Trak, Inc. Online simulations have several advantages over other types of stock market games. They are easy for a teacher to administer because the rankings and computations are done automatically. They often involve many other schools in the same geographic region, enhancing the excitement of the competition. The online games may offer technical features that would be difficult to include in a teacher-designed project. And spillover benefits exist because students are encouraged to achieve computer literacy in addition to economic literacy.

The Centers for Economic Education at several California State Universities (CSUs) sponsor Stock-Trak run stock market simulations for middle school and high school students. These campuses are currently Bakersfield, Fresno, Fullerton, and Hayward. The California Council on Economic Education, working with CSU Fullerton, offers a variant on these simulations called the Capital Market Contest. For more information on these CSU-based simulations, and to enroll teams, teachers may visit www.csusms.com.

There are currently two main ways to play the CSU games. Teachers may enroll teams for a ten week simulation taking place each fall or spring semester. In these games students invest an imaginary $100,000 in stocks and/or mutual funds. For a longer term perspective, teachers may enroll teams in a seven month nationwide simulation. The CSU Centers for Economic Education at Bakersfield, Fresno, Fullerton, and Hayward offer different prizes and awards ceremonies for those with the most capital gains or the best submitted essays. In the Capital Market Contest students compete for prizes based on an essay contest, an oral presentation, and pre and post testing as well as on the value of their portfolio.

Although the programs offered and fees charged by the different Centers for Economic Education vary, generally a teacher-training workshop is offered prior to each simulation. The twice-yearly workshops at Cal State Hayward, for example, cover stock market basics, the rules of the game and applications to economics, online computer practice, lesson plans and background materials, teaching ideas from experienced teachers, and a discussion with a local broker.

CAUTIONS ABOUT USING STOCK MARKET SIMULATIONS

As exciting and rewarding as a stock market game can be for students, teachers need to be aware of several pitfalls in these games. The most serious of these are outlined in the second column of Table 2: Stock Market Simulation Teacher Do’s and Don’ts. First and foremost, students do not learn economics merely by playing the game. Teachers need to use the stock market simulation as an application for teaching important concepts.1 Also, teachers should be careful not to let a stock game dominate too much of their class time and class activities. Much of the mechanics of the games can be done by students outside of class, freeing up time for the teacher to address other economics concepts during scarce class time.

A serious problem with most stock market games is that, due to the length of school semesters, they last for only ten or twelve weeks. Students should not be given the impression that most responsible investors buy and sell stocks several times during any given ten-week period. Ten weeks is not a realistic time frame for assessing investment skills or the potential value of financial investing in general. Teachers need to emphasize that the game should be viewed as a snapshot of the market, rather than a demonstration of long-term market operations.

Associated with this concern, because of the short time frame for the games, students are encouraged to use unrealistically risky strategies if they are motivated to “win” the games by maximizing the value of their portfolios. The CSU games have rales to discourage these strategies2, but students still easily determine that buying as many low-price volatile stocks as possible enhances their chances of making the most capital gains in the short time period. Therefore teachers should base student grades on assignments that evaluate learning, such as essays based on investment research or applications of economics concepts. Student grades should not be tied to short-run capital gains or losses.

Used properly and when the concerns in Table 2 are addressed, using a stock market simulation can provide a realistic, lasting and rewarding learning experience for your students. When students are actively involved in lessons that relate to their future and to frequent news events, they are likely to understand and remember what they have learned. In this way, stock market simulations can be a successful and rewarding way to teach economics.

1 Materials for teaching economics using stock market simulations are available from the National Council on Economic Education (www.ncee.net.)

2 Student teams may not trade stocks valued at under $5 a share, may not engage in day trading, and must follow a “3-4-25 Rule:” they must have at least three different investments in their portfolios by the fourth week of the simulation, and may invest no more than $25,000 in any one security.

References

Lopus, Jane and Dennis Placone. 2002. Online Stock Market Games for High Schools. Journal of Eco nomic Education: Volume 33 No. 2, (Spring.)

Jane Lopus is Professor of Economics and Director of the Center for Economic Education at California State University, Hayward. A former high school economics teacher, she holds a Ph.D. in Economics as well as a master’s degree in special education. Dr. Lopus is an active researcher in economic education and has published many journal articles and economics curriculum materials.

Copyright California Council for the Social Studies Fall 2003

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