Lesson 5  

Objectives: In this lesson, you will learn to calculate the gains and losses of stock portfolios. Although the Global Stock Game (GSG) will calculate profits and losses automatically, you should learn the basic math skills in calculating their stock investment the old-fashioned way. Also, you will do a lot of number crunching to compare the gains and losses of stock portfolios with benchmarks such as T-bonds, bank accounts, and the U.S. market represented by the S&P 500 Index.

Background: When you create a portfolio by registering an account in the GSG, the same amount is automatically invested in the Vanguard 500 Index Trust, symbol VFINX, the Standard & Poor's 500 Indices, a commonly used benchmark for the U.S. stock market. The same amount is also invested in a savings and T-bond accounts that yield 4% and 6%, respectively.

By comparing gains and losses to these benchmarks, you can see whether you made more or less money than the market in general or whether you are better off putting money in the bank or in a safer investment with the U.S. Treasury.

Activities:

  1. Review the financial terms in stock investing:

    Stock price: an amount agreed between a buyer and a seller in a stock transaction

    Purchase price: an amount a buyer paid for a stock (bid)

    Current price: current stock quotes from the GSG

    Previous close: closing price from the previous day

    Sales price: an amount a seller gets for a stock (ask)

    Day change: the amount a share price changes from the previous close

    Gain: sales price is greater than the purchase price

    Loss: sales price is less than the purchase price 
     
    Commission: the stockbroker's transaction fee to buy or sell stocks

    Risk: the chance of losing money in an investment. In stock investments, the sales price is less than the purchase price of a stock. In other words, profits are not guaranteed in stock investing.

  2. Determine how gains or losses are calculated in the GSG using the existing portfolio. Click here to view the portfolio.

    From the portfolio, we get the data for Stock Agilent (A):
     
    Price (purchase price): $40.19
    Current price: $38.81
    Day change: - $0.93
    Commissions: $15 (default unless set by teacher)

    Using this data you should be able to answer the following questions and confirm the numbers on the portfolio print-out.

    What is the previous day's closing price    ?
    $38.81 + $0.93 = $39.74

    What is the total cost of the purchase?
    Total cost
    = (purchase price x number of shares) + commissions:
    = ($40.19 x 100) + $15
    = $4,034

    What is the current value of your stock now?
    ("subtotal" on GSG table)?
    If you sell the stock at this moment, this amount less
    commissions will be the proceeds from sales.

    Subtotal of current value
    = current price x number of shares:
    = $38.81 x 100
    = $3,881

    What are the gains or losses?
    Gains or losses = cost - current value:
    $4,019 - 3,881 = -$138

    What is the percent of gains or losses?
    Percent of gains or losses =
    ((<price / >price) x  100) - 100) = percent gain or loss
    (($38.81 / $40.19) x     100) - 100)
    = -3.43%

  3. Compare the sample portfolio with the benchmarks: Click here for the benchmarks data.

Item Type Total Amount ($)
1 S&P 500 102,065
2 T-bonds 100,641
3 Savings Account 100,427
4 Sample portfolio 96,520

The initial amount of all four types of investments is $100,000.

  1. How did the performance of the sample portfolio compare with the three benchmarks?

  2. Which type of investment had the most gains during this period?

  3. One of the strategies of managing risks in investing is through diversification. By comparing investments in the sample portfolio with the S&P 500 benchmarks, can you tell why diversification is a good strategy?

 

 

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