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Teach Investment Theory with Real-Time Stock Trading

Using an online stock-trading simulation helps students put theory into practice—with a safety net. The payoff for top performers? A grade boost.

Educator

Alexander Barinov, PhD

Assistant Professor of Finance, University of California, Riverside

PhD and MS in Finance, MA and BA in Economics

To many students, the ups and downs of the stock market may seem like those of a prime-time TV show: It can be entertaining, exciting, or even nerve-wracking to watch, but in the end there is somewhat of a disconnect with everyday life.

For Alexander Barinov, PhD, assistant professor of finance at the University of California, Riverside, that sideline view was problematic. He needed his finance students to feel more than engagement in his class; for them to fully grasp the intricacies of the stock market and the factors that influence market volatility, they needed to feel the sting when the Dow plummets.

Challenge: Plenty of theory, not enough practice

The principles of finance all seem relatively straightforward when shared in a classroom. However, there can be a large discrepancy between theory and practice, and this conundrum was something that Barinov wanted to solve for the students in his Trading Strategies and Financial Models course.

These students are often bright business majors who have a clear understanding of the fundamentals of stocks, investment risk, and the most common behaviors of the markets where equities are traded.

“We know [the different] classes of stocks, and we can sort stocks, and we can look at price-to-earnings ratios, [and] we can look at past performance, and we can look at trading volume,” says Barinov. But all of these necessities did not expose students to the rough-and-tumble world of actual global finance, where theories and best practices sometimes have little bearing on investment performance.

Barinov realized that the only way to give his students a clear-eyed view of how trading works in the real world was to throw them into the deep end of the pool and see if they would sink or swim.

Innovation: Real-world stock trading (with a safety net)

To be clear, Barinov does not encourage his students to become day traders. Instead, he uses a simulated online global trading application called StockTrak to provide students with an immediate sense of how “textbook” stock-trading theories play out in real life. The system allows them to trade actual stocks and bonds as well as monitor and react to the market volatility on a day-by-day basis.

After opening a StockTrak account at the beginning of the course, each student is given $500,000 in pretend funds—what Barinov likes to call “Monopoly money”—to create an individual stock-trading portfolio.

“I’m trying to make the students think that if you buy certain stocks and sell other stocks, that will create a good return and a good performance,” says Barinov. “But [they] still must think about what could go wrong.”

In other words, students need exposure to the unpredictability of the actual markets, and that is just what this experience provides—along with an interesting opportunity that can impact them personally, in a very real way.

Context

“I’m telling students about specific stock-trading strategies and saying, ‘Why don’t you go out and do exactly this thing and see in real time how it develops? How big could the gains or losses be? Does it look like what you expected?’”

— Alexander Barinov, PhD

Course: MGT 213 Trading Strategies and Financial Models

Frequency: Two 80-minute class meetings per week for 10 weeks

Class size: 10–40

Course description: Introduces students to stock market anomalies and ways to predict their strength, to profit from them, and to measure the risk and trading costs of performing such trading strategies. We consider the most well-known empirical deviations from the CAPM and trading strategies based on them. The main idea of the course is to cover an anomaly one week and trade on the anomaly on a simulation trading platform the next week.

See resources shared by Alexander Barinov, PhD

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Lesson: Test any investment theory

Barinov does not want students to see his course as an opportunity to test impulse buying and selling. Instead, the purpose is to reinforce tried-and-true principles and arm the students with the knowledge that will let them research equities, identify anomalies in the market, and know the right steps to take to profit from those anomalies.

In other words, he wants them to think like a responsible stock trader—building as much certainty as possible into an uncertain situation.

Here are some of the strategies that Barinov uses to help his students make that connection.

Form groups to introduce differing viewpoints

Barinov allows his students to form stock-trading groups of no more than three people, which creates a sense of friendly competition within each class. Collaborating, rather than working solo, also teaches students to take varying viewpoints into account in any decisions they make.

“I like the teamwork, and they can also specialize to a certain extent,” he says. “There might be a number-cruncher, as well as someone who has the trading intuition. That’s fun.”

Teach first, trade later

Each week, Barinov introduces his class to certain stock principles and strategies—such as “price momentum” or “value effect.” The following week, students are then expected to make trades based on these strategies.

This immediate reinforcement helps students see each principle in action, so that principles of finance become more than “lessons in a book,” as Barinov calls them.

Narrow the playing field

One can buy and sell thousands of stocks on StockTrak, but the assignments instruct students to screen stocks on several criteria, some different from assignment to assignment and some representing recurring themes in the course. The screening process usually leaves around 50 stocks to choose from. Each student group is then required to pick 10 stocks that satisfy the chosen criteria: five to buy and hold, and five more to sell short (basically borrowing shares to sell now in hopes of buying back later at a lower price, when you can pocket the profit). Students choose how much money to allocate, as long as each individual investment is less than $50,000.

Have frequent discussions about results

As the semester progresses and students gain more experience, Barinov uses class time to engage in discussion about their trading progress, experiences, and results.

“Everyone shares their experience,” he says. “[They say,] ‘This is what worked for us,’ or ‘This strategy really burned us,’ or ‘This is something we did wrong and then realized we did it wrong,’ or ‘This is a success story,’” says Barinov. The discussions serve to reinforce the thinking behind the main theories that Barinov introduces in class, and again tie those theories to real-world performance.

Create a real reward

The funds the students are trading are only “Monopoly money,” but there is a potential for a real gain at the end of the semester: The group that racks up the best profit and performance at the end of the semester receives a 3% increase in their final grade.

“It’s not huge,” Barinov says, “but in many cases it lets someone jump [up] one step—maybe from a B+ to an A-. And these students care about that.”

Outcomes

Barinov has seen that his students appreciate the chance to trade real stocks with real prices in real time, just like the Wall Street pros.

“Even though they’re trading Monopoly money, they like the fact that it’s a class that brings together many things,” says Barinov. “Especially when they start analyzing the stock market data and historical stock returns, some of them come to me and say, ‘I finally know why I had to sit through statistics class!’”

Student feedback

In course evaluations, students support Barinov’s methods enthusiastically. Here are a few of their verbatim comments:

“He is my favorite teacher in UC Riverside. His course is a combination of practice and knowledge. If possible, I advise all students would take this class. Sometimes I think my professor, Dr. Barinov changed the view of my world. I never believed that finance could be analyzed like that.”

“It was the most useful and interesting class in my whole MBA program. I wish I can take more finance courses with Prof. Barinov.”

“[This] was the first time I felt like an actual finance student. We learned real-life trading strategies and applied them in a real-world trading scenario. This class combined all the previous finance classes I had taken into one hands-on learning experience.”

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