Compound Interest

Compound Interest is an extremely important concept in any level of finance. Compound interest can make an enormous difference in the return you get from your investments.As we know, simple interest is the act of earning interest on an investment. If you earned 10% on 100 dollars you would receive 10 dollars every year. On the other hand, with compound interest, that amount grows with interest that you receive. This is true for nearly all investments nowadays, including your bank account! If you want to see compound interest in action, check out our interactive Compound Interest Calculator, which has charts and graphs that update as you change the saving rules! An example that is frequently used is the American Indians sale Manhattan in New York for various items worth about $16. To many that would seem like a very bad deal since $16 today is not worth much. However, more than 400 years ago that was a lot of money. If the American Indians had sold the items and invested the money at 8% compounded interest, they not only would have been able to buy back Manhattan today, but would have a very large sum of money leftover. This is the very real power of compound interest over extended periods of time. You might not have 400 years to save, but even over shorter periods of time, compound interest will add up quickly. Lets look at an analogy of an planting trees that grow and produce other trees that would mimic a ten percent compounded interest. In this example, every tree will grow 10% of a new tree every year. Year 0: You have saved some money and managed to buy 10 trees and each 10 trees make one tree. Year 1: The next year you will have 11 trees Year 2: The year after that 12.1 trees Year 3: Then 13.3 trees Year 10: After ten years you will 25.9 trees If this had been simple interest it would have only been twenty trees. Visually it looks something like this: compound interest This may not seem like much but if we look at twenty five years the amount investment on compound interest vs simple interest, compound interest would get an extra 833 trees! If we look at this graphically we can see the difference between the two even further. compoundinterest2 We can see from the graph above that the compound interest curve looks a little like a hockey stick. This will be true for all compound interest curves and is called an exponential curve. From here it is apparent that after 50 years, compound interest makes a very large difference.

Calculation

The calculation of compound interest is quite simple but can get more complex when we start changing the compounding period. Here, we will look at the basics for compounding once a year and calculating our interest once a year.

A = P(1 + R)t

Example: If we have a 5% interest and $100 investment:

Year 1: 105=100 (1+0.05)1 Year 2: 110.25=100 (1+0.05)2 Year 2: 115.76=100 (1+0.05)3 or Year 2: 110.25=105*(1+0.05) Year 3: 115.76=110.25*(1+0.05)

Click Here to try it!

Finance Websites

Here are some popular Finance Websites to help you get the information you need and advance your trading even further.

List of Finance Websites:

Quotes, news, tools

  • Google Finance – user friendly charts, screeners, news. This is powered by Google, and allows exporting of some historical data. They even have an API if you want to integrate it with stock picking software
  • Yahoo Finance – user friendly charts, screeners, news, options, bonds. Yahoo! Finance is a source we use often for some of the latest-breaking investment news stories
  • Barchart – technical charts, news, futures, options, Forex
  • Stockwatch – quotes and news
  • Nasdaq – quotes, news, analyst ratings, lots of information
  • TheGlobeandMail – quotes, charts, ratings, news
  • MarketWatch – quotes, charts, news, personal finance
  • Bloomberg – quotes, news
  • Reuters – quotes, news
  • Ino – quotes, news,futures
  • Zacks – screeners, news, earnings
  • The Street – quotes, cramer, news
  • Wall Street Journal – quotes, news

News and Blogs

Futures and Commodities

Brokerages

Misc

Create a Contest

Contest Links:   Create a Contest!

Learning how to Create a Contest on HowTheMarketWorks.com is simple!

Start by logging in or creating an account. Then you can click here or click “Create your own Contest” under the “Contests” menu at the top of the screen: contest1 Once you are on the contest page, just give your contest a name, describe it, and set a few basic trading rules! If you aren’t sure what rules to use, we pre-populate all rules with the most popular settings! createcontest

Contest Creation

  1. Contest Name

    Give your contest a name! This will be handy for other people to find the contest you created.
  2. Group Type

    We want to know who uses HTMW! The group type lets us know where our stock game is most popular, which we keep in mind when we develop new features.
  3. Expected Number of Users

    This is what we use to estimate how many students are on each account (and we know how many students are actually using the site!)
  4. Description

    This is useful for someone searching for your contest, they can look using the contest name and know its the right one by the description.
  5. Cash and Currency

    It is usually recommended to use the same currency you are in to make it more realistic. Don’t worry about having to exchange money, we apply the exchange rate every time a trade is made. Initial cash can be set between $10,000 and $500,000.
  6. Dates

    Registration Dates: This is when your users are allowed to join the contest and can be changed at anytime. It does not affect the trading dates. We recommend opening the registration a bit earlier than the actual trading period so people can practice before the contest starts. Trading Dates: This when trading starts and ends.
  7. Tool-tips

    By hovering over the little question marks “?”, text will appear. They can be very useful for finding quick information about the field you are trying to fill out.
  8. Public or Private

    Public contests can be joined by anyone. Private contests will prompt you to create a password in order for people to join. Note: If you are the contest creator you can see everyone’s trades regardless of whether it is private or public.
  9. Minimum Price

    The minimum price is the lowest price you can buy or short (if enabled). If you set your limit at $1.00 it means you cannot buy stocks with a cost of less than $1.00. We recommend that beginners have a limit of $1.00 instead of $0.25, since trading in penny stocks for a contest leaves too much up to blind luck.
  10. Margin

    This allows players to take a loan if they spend all of their cash equal to the amount of initial cash they had. Users will be charged 8% interest on the loan. You do not have to take out the loan, simply spend all your cash and you will start using your loan margin automatically. You can also change the interest amount by contacting support. Not Recommended For Beginners
  11. Short Selling

    This will allow you to short sell allowing users to profit if the stock price goes down. Unlike in real life, there are no margin requirements.
  12. Day Trading

    Allows users to buy and sell a given stock in the same day. If not allowed, users must wait until the next trading day to sell a stock they bought the same day. Note: this is only true for one stock, you can still buy and sell multiple different stocks in one day as long as it was not already traded that day.
  13. Allowed Securities

    US stocks/ETFs: Allows all the stocks on NYSE, AMEX, NASDAQ, NYSEARCA US Mutual Funds: Allows Mutual fund trading. Note: these only trade once a day after the market close. US OTCBB: Over the Counter Stocks. A large majority are penny stocks. Not Recommended For Beginners. Toronto Stocks: Allows Canadian Stocks
  14. Commission

    Users will be charged the chosen $ amount every time a trade is made, regardless of whether it is a buy,sell, short or cover. Note:An order is not the same as a trade, if an order is made, but is cancelled or expires before it goes through, the commission is not charged.
  15. Position Limit

    The maximum amount of one stock(or mutual fund) you can own as a percentage of the total portfolio value. Example:With 25,000$ initial cash and 25% position limit, you can only trade $6,250 in one stock. Meaning you can’t buy more than 6,250$ of AAPL even if you had the money for it. 100% limits are Recommended for beginners. Note: If your portfolio value decreases making the limit lower than what you own in a given stock you will not be forced out of your position.
  16. Resets

    This allows users in your contest to reset their portfolios to the initial cash. All trades are wiped out, and they start back from the beginning.
  17. Assignment

    Allows the creation of an assignment to track if your students have performed certain tasks on the website. Learn more about assignments
  18. Contest Creation

    Click the Green Button once you’ve filled everything out and you’ve created your contest. Don’t worry, you can change everything by hitting the edit button after you’ve created it.
And thats it! You will get a confirmation page where you will find a link to give anyone to register directly in to your custom contests, or they can find it using the “Join Contest” page! Click here to create a contest now!

Market Hours for Stocks and Mutual Funds

Real-life and the virtual trading hours on HowTheMarketWorks are the same. The US and Canadian Markets open at 9:30 AM ET (GMT-6:00) and close at 4:00 PM ET. Monday to Friday, with exceptions on National Holidays.

Market Hours for Mutual Funds:

Mutual Funds orders remain open until the market closes at 4:00 pm ET and execute anywhere between 5:00 and 6:30 pm in general. The price can vary between when you placed your order and therefore the total quantity of shares you receive will likely be different from the estimation when you placed your order. If you did not place your order before the 4:00 pm close of the current day, it will execute at the next day’s available market close.

Can I trade in the Pre- and After-Markets?

We do not offer pre and after markets as they do not have a stated volume, after-market and pre-market trading is usually done by very large institutional investors, or “off exchange” by one investor directy to another; since these trading periods are not available to the typical investors we exclude them for the sake of realism. !!! Note: All trades execute at near Real-Time price but in the open positions the prices are 15-20 minutes delayed.

Order

Definition:

An order or Stock Order (in finance terms) is to give a broker or brokerage firm instructions to purchase (sell) or short (cover) a security. Traditionally this was done on the phone or even in person directly to the broker or someone under him. Nowadays it is most frequently done online. The orders can vary greatly between choosing market orders, limit orders and stop orders as well as changing how the order will expire. An order does not mean that you are guaranteed to own (or sell) the stock. It just means that your broker is trying to get it “filled” for you. Filled meaning that they will try and fulfill your stock order. If, for example, you had a buy order, then your broker will be trying to get you the stocks you wanted to buy and thus “fill” or “execute” your trade. Just like in real life, if you try to buy something no one is willing to sell right now you won’t be able to get it and you will have to wait until someone is willing to sell.

Using Orders on HowTheMarketWorks

PLACING A STOCK ORDER

Placing an order on HowTheMarketWorks is easy. tradescreen
  1. Action: The action will specify whether you are trying to buy, sell, short or cover. You can select this by clicking on the arrow and selecting an item from the drop down menu.
  2. Symbol: By filling the symbol you will get a quote below. If you don’t know the symbol of the company you are looking for you can click on the magnifying glass. If you don’t know that either, you can click on the dart and will give you some ideas!
  3. Quantity:This is the number of shares you want. Don’t worry if your not sure! You can see how much it will tell you your estimated cost below and you can use a slider to change the amount you wish to get, or similarly, just delete the number and write a new number.
  4. Type:This will select the type of order you can select, either a market order, limit order or stop order.
  5. Order Term:This will select the order term. Good-til Day will try to execute until the end of the trading day at 4:00 pm ET. Good-til Cancel will try to execute until you cancel the order.
  6. Limit/Stop Price:This specifies the limit or stop price that you are using to execute your trade. The table below is very useful in determining when a limit or stop will be executed, seeing that there is also enough volume.
!!! Note: Cash is set aside in Withheld Cash until the order executes. The Stop and limit orders will execute when: stock order limitstoptable

Try it Yourself!

ORDER HISTORY

Orders that are waiting to be executed on the Order History page as well as any expired, filled or cancelled orders. orderhistory 1. We can see multiple tabs on the page. By selecting the tab in 1. we can order the different types of orders that can be seen in 2. A – All will show all the orders you’ve created throughout your challenge. If you don’t see any orders and you think you should, don’t forget to check that you have selected the correct contest! contest O – Open shows all the orders that are still trying to execute and get filled. Note: every pending order will automatically put the amount of cash you previewed aside while waiting to execute. F – Filled shows all the orders that have been filled and thus traded successfully. C – Cancelled shows all the orders that you or the system has cancelled. To cancel an order that is pending simply go to this screen and hit the cancel button in 2. Similarly, if you see system cancelled, it has been cancelled by the system for a variety of different reasons. This could be because the order broke a trading rule or less likely that we made some changes. X – Expired shows the order’s that expired, usually a market order or good til day order that expired automatically after not filling at the end of the day.

Order Filling – Trade

To have an order successfully go through – these conditions have to be met:
  • Volume – There must be enough trading volume for your order to execute. In other words, someone has to buy/sell the shares you sell/buy. The site will uses daily volume so the volume will be higher at the end of day.
  • Expiration – The order must be open.
  • Limit/Stop – The order must hit the target price you set if you used a limit or stop order.(note:this goes by bid ask, so even if the last price hit your target, the target must hit the appropriate bid or ask.)
  • Trading – The stock you are trying to trade must currently be trading.
!!! Note: Mutual Fund orders will always remain open until the end of the day. The trade will only go through at the end of the trading day, between 5:30 pm and 6:30 pm ET.

Day Trading

Definition

Day trading is the act of buying and selling (or shorting and covering) a stock or other investment in the same day. Day trading has become a very popular way of making money. It can be very profitable or you could lose that money just as quickly as you made it. This activity is performed either directly via a stock exchange trading platform or through online trading websites provided by brokers.

Details

Difficulty

One of the greatest barriers to entry for day trading, not withstanding skills and knowledge, is the amount of money necessary to succeed. If we set a goal of beating the market (because otherwise it wouldn’t be worth the day trader’s time) he would have to make about 10% profit. It means you would need more than $150,000 just to make minimum wage, without taking into consideration taxes (the capital gains tax owed on day trading is significant), cost of an office, equipment, and any analysis software you might be using. Even with that investment, only about 1 in 100 investors who day trade on their own turn a profit. Another pitfall is that people wrongly believe that they can be just as good as the institutional investors because they can “get lucky”, or learn while doing.  However, the greatest success can be found by either working through a day trading firm (and get access to their tools and reseach), and by using a simulator first to test your strategies.

Having what it takes

Let’s face it, day trading is not easy and can be very stressful. The following are some characteristics of good day traders: Finance Knowledge – A wealth of knowledge of Technical Patterns, understanding how news affects stock prices and a very good understanding of the basics among others, is necessary. Interest – You will need a strong interest to watch stocks and market news if you are doing this on a regular basis. If you do not have sufficient interest, the likelihood is you will quit before becoming profitable. Perseverance – There can be very high high’s and very low low’s so it’s important to be able to persevere through the low’s. Quickness – Day trading is measured in seconds and milliseconds, being able to react quickly and place trades quickly is essential. Multi-Tasking – Just like being a fast trader, one must also be able to see and look at multiple different screens with large quantities of information to make quick and informed decisions. Independence – Day trader’s frequently spend their time in front of a computer screen, oftentimes alone in their office. It can be quite daunting to have little human contact. Managing Stress – As we stated earlier, day trading is stressful, more than many other jobs as there are constant demands for your attention and one big mistake could be incredibly costly. Organized – Being prepared is also very important to day traders, a lot of the work can be done after the market closes at night or before the market opens in the morning. If you are not able organize and prepare your information before the chaos begins, it will be that much harder to manage. Technologically Inclined – Charts, news feeds, trading screens, internet, these are all things that are absolutely necessary to get an edge on the competition in the day trading game. Without a technologically inclined mind, fixing internet problems and upgrading your layout to multiple screens could be quite daunting and expensive.

Tips

So you’ve decided to start day trading, what’s next? Learning – What’s important is to start learning hands on as much as possible before losing your money learning. Then, once your consistently profitable, you can apply what you’ve learned without losing money while your learning. Selection – One of the main challenges for a day trader is that stock prices usually change very little throughout the day and is usually reserved to the first few hours of trading. In order to make profitable trades you will need to find stocks with higher volatility, have sufficient volume and have a low enough price to be able to invest larger quantities of money and thus be able to buy more shares. Spread – The other problem you must overcome is the bid/ask spread. Finding stocks that meet the criteria for profitable trades should also take into account the spread. A large spread with a liquidity problem could easily make even the most successful day trader lose money. Commission Commission can be around 10$ a trade and can quickly eat your profit, especially if you only trading small amounts. Luckily, there are many different brokerages with cheaper commissions which are often based on how many trades you make, so it’s important to shop around. Taxes and Businesses Day trading could be considered a business where you live and therefore require certain procedures to be followed before you start day trading, especially if you are investing other peoples money. Tax considerations can also be very important to the overall profit you make. It is very important to get informed about these before Day Trading RulesDon’t forget! Make sure to check the Day Trading Rules before opening a real brokerage account and day trading!

Selling Short

Definition:

Short selling or Selling Short is the act of borrowing a security from someone else, usually a broker, selling it and later repurchasing the stock in the hopes that it will be cheaper.

Explanation:

In simple terms opening a short position (or going short, shorting) is used when you think an asset will decrease in price. Short sales require a margin account and have strict margin requirements, so they may not be available to investors with less than $25,000 or so to invest. Part of this is because you are borrowing something that isn’t yours but also because, in theory, the loss can be infinite. When you buy a stock normally, the most you can lose is your purchasing price. When you are shorting a stock, however, things are a bit more different. If you short a penny stock trading at $0.05, thinking it will go down to $0.01, but instead the company has a breakthrough and the price takes off, your loss can be far more than you were prepared to invest. To close a short, a cover order is used to buy the share you borrowed and essentially give back the share you had borrowed.

Example of Selling Short:

Let’s assume you think stock ABC is going to go from $35 to $30. So you call your broker and decide to short it. You then put money in your margin account which will be added with $35 for the borrowed sale of ABC (or less, sometimes some of the margin is frozen and kept by the broker for trading fees, etc.). You then notice that the price has gone from $35 to $45. The broker than calls you to put more money in your margin account, you decide not to and buy the shares for $45 to give back your borrowed shares. You have then incurred a loss of $10 per share plus the commission fees. On the other hand, if the price did fall to $30, you could then “cover” your short by buying the shares for cheaper than you sold them, returning the shares to the broker, and keeping the $5 per share difference (minus commissions).

Moving Averages

Moving Averages

Moving Averages are one of the most popular and important technical analysis tools. The ease of use and simple calculation make it a great tool to get information quickly. They also provide the basics for more advanced technical analysis tools like MACD and Bollinger Bands and can be useful for removing some of the “noise” from daily fluctuations in the market. In simple terms, the moving average is an average that compares the previous period over time. There are two types of moving averages: the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) which puts more weight on the latest date. We will explore the differences more in depth later on.

Moving Average Technical Analysis

Moving Averages are lagging indicators and give an indication of the strength of a trend rather than predict movement in the asset or market. They are also useful for identifying support and resistance lines and can be used to look at a market reversal. As we will see below, the longer the period used for the SMA, the stronger the trend, hence a 200 day SMA provides a stronger indication of trend than a 10 day SMA. Moving Averages give a lot of information at crossings between shorter and longer Moving Averages, the distance between the price and the moving average and provide support and resistance lines as well. Below is a graph with a 50 day and 200 day SMA. moving averages The first thing to point out is that the 50 day SMA follows the price much more closely than the 200 day SMA. Hence the longer the period of the SMA, the smoother and more static the line is. As an analogy the 10-day SMA is like a sports car that can turn quick and easily whereas the 200-day SMA is like a large truck that cannot change or turn quickly. Take note of the points where price and SMA’s or EMA’s cross each other. If we start with the leftmost arrow (1), we can see that the price crosses the 50 day and 200 day multiple times. This is not a strong indication of trend, as the price can frequently give “false” warnings in day to day trading. A much stronger indication is when a shorter period SMA crosses a longer period SMA. As we can see at the second arrow (2). The 50 day SMA crosses the 200 day SMA from the top (downward) which is a strong indication of a bear market. On the other hand, the third arrow (3) has the 50 day SMA crossing the 200 day SMA from the bottom (upward) giving a strong indication of a bull market. movingaverages2 Another aspect we can see from moving averages is the support and resistance lines. Support lines are when the moving average is below the price and resistance lines are when the moving average is above the price. As we can see from the multiple small circles, the price rarely goes above or below the moving averages for long and even less frequently when it is a longer period. The other thing to notice is the large oval. The greater the distance between a moving average and the underlying price, the more we can expect a reversal of the current trend as we can see above. !!! Note: These indicators can be useful to determine resistance, support, some reversals and trend strength. However, as you can see from the top left in the graph, this is not always the case. The 50 day SMA came very close to crossing the 200 day average but would not have indicated a very strong trend!

SMA vs EMA

As we saw earlier the EMA gives more weight to the current price which we will see in more detail in the calculation section. emavssma You can see slight discrepancies above between the EMA and SMA. With a price that has more volatility however, you will see greater differences. We can also see that there the EMA tracks some big changes more closely, especially for the EMA that is 10 days as opposed to 50 days.

Moving Average Calculations

The Simple Moving Average calculation is far more straight forward than the Exponential Moving Average Calculation. SMA calculation: N Day SMA: Is the sum of N previous closing prices over N where N is the number of Days considered. For example: 20 Day SMA is the sum of the closing prices of the 19 previous days(includes today’s closing) over 20. If we have a 5 day SMA with prices as follows:
Jan 1st 12.5
Jan 2nd 13.7
Jan 3rd 14.5
Jan 4th 13.9
Jan 5th 16.8
  Then the 5-Day SMA on the 5th of January is: (12.5+13.7+14.5+13.9+16.8)/5 = 14.28 !!! You always need the number of days data before you can calculate that day’s Average! So if you want the 200 day SMA for a particular day you need 200 days of data before that! Mathematical Formula: (Σ closing price from i-N to i) / N where i is the current day and N is the time period. EMA calculation: The EMA is a more complex calculation, though, as we have seen, just as easy to interpret. EMA = (current Price * 2/(1+N)) + (Previous Day’s EMA * (1-2/(1+N)) The expression 2/(1+N) is called the weighting multiplier and will be higher for smaller periods of EMA. This means that more weight will be given to the last day’s price. SMA VS EMA
Price SMA-5 EMA-5
19 17 17
20 18 18
50 24.8 28.67
22 25.8 26.44
23 26.8 25.3
From the table above we can see from the red number in the table, the EMA is much higher than the SMA. This is because the EMA will more closely follow a the last price change.