Neopets/Stock market

The stock market, in real life, is a method of buying and selling the ownership of a firm. In many respects, it is a form of legalized gambling. In the real world, it's legal because there is no "house" to steal all your money, and often, as the market progresses, there is a net payoff which is better than the interest rates offered by the banks.

For more background on stock markets in real life, see the section of the same name at the bottom of this article. The earlier sections of this article deal with the Neopets stock market in particular, which is an easy way to get a lot of money.

The Neopets stock market can be found here.

Strategy

Making an Informed Decision

Neopets does not publish long-term information about their stocks, so it can be difficult to know when one is "low" such that you should keep investing in it. For this sake, there are sites like NeoDaq.com that can show you the price history of certain stocks.

The most valuable advice you can get is: Don't invest all your money at once. If you keep a couple of promising leads on your "My Portfolio" page, then you can invest more in them when they drop down -- and you get a better deal for your money.

Try to buy from many companies in the same price bracket. This spreads your risk out around more companies, so that mistakes you make are less important.

Investment Timeframes

One can elect to invest in the Neopian stock market on an order of years (long-term), months (mid-term), or days (short-term). This is a strategic analysis of those different methods.

It should first be noted that, theoretically speaking, shorter-term investments cannot do much worse than longer-term investments. If a year-long investment strategy were really the best strategy out there, then a day-long investor would theoretically look out at the market and say, "gee, I don't think I need to change anything in my investment today," out to the timescale of one year.

Long-term Investment

Unlike the shorter-term investment strategies, which need to be judged by experience, long-term investment can be judged in terms of cold, hard, numbers.

The first data we have for the NeoDAQ is given on NeoDAQ.com as April 16, 2002. It averaged maybe ~900 np. Around April 16, 2006, four years later, it was roughly averaging ~1700 np. Between those two came two major recessions; the "Thanksgiving recession" in the last week of November 2003, and the "Black Sunday" crash of November 14, 2004. In spite of those two recessions, the NeoDAQ has, so far, averaged roughly a 16% yearly interest rate, compounded daily. Should this hold up, it would mean that long-term investment in the stock market is far, far better than investment in even the best bank accounts, making the Neopian stock market on par with real-world stock markets.

Mid-term Investment

Professional Neopian investors, like those at NeoDAQ.com, tend to prefer this timescale; they buy stocks at ~15-20 np apeice and then wait several months to sell any that have experienced a long-term increase to ~40np apeice or higher. In the NeoDAQ.com "stocks scoresheet," the time interval given for this is on the order of 3-6 months of waiting, for the best stocks. In theory, this means a 100%-200% return every half of a year. In practice, that number is a little overinflated, because not all of your invested money will necessarily pay off in six months time; but even as a 100% return per year, the profit is still sizeable.

Short-term Investment

Short-term investment offers even better potential profits than mid-term investment, but requires more daily work, more data analysis, and it is more risky. Unfortunately, the vast majority of first-time investors are investing for the short-term and yet, at the same time, are not doing the requisite analysis; they tend to lose a lot from the experience.

Good investors, working daily, can make thousands of neopoints a day every day with a good short-term investment strategy.

What Should You Buy?

This section is geared towards short-term investment because that is the most popular variety used on Neopets.com, and also has the potential to be the most profitable.

Low-Level Investment

If you are investing less than 15,000 neopoints, then the best strategy is to buy as many 15 np stocks as you are willing, and then wait to sell them until they hit 17-18 neopoints.

The reason is maybe more clearly illustrated if I have 1np stocks versus 1000 np stocks. Suppose I invest 10,000 np in 1 np stocks; I get 10,000 shares. Suppose this goes up 1 np, and then I sell my shares. Then I get 20,000 np from selling, so I've made a clean 10,000 np. (This is why Neopets.com says that you can't buy stocks less than 15np.)

Suppose I invest 10,000 np in 1000 np stocks. That gives me 10 shares. Suppose that the stock price, again, goes up 1 np, and then I sell. That lets me sell for 10010 np, so I've only made 10 np.

The situation can be slightly more complex, but in general, a stock like POWR costs ~600 np and varies daily within 10np, meaning roughly a 1.7% return; whereas a 15np stock varying +2 np immediately gets you a 13.3% return on investment.

Mid-Level Investment

As you get to the 15,000 np border, you begin to run into a limit that the Neopets Team has placed for you: You cannot buy more than 1000 shares per day. Why is this a limit? Because if I only place 15,000 np in the stock market, and I have 100,000 np, I'm not using all of my money to get a maximum return! Essentially, 85,000 np sits by the side, earning 0% interest, while I send my 15,000 np in to earn high-percentage return.

To some extent, this can be combatted by spending several days to invest all your money into a diverse profile of 15np stocks and then, every day thereafter, rearranging your stock money about the market by selling exactly 1000 shares from your highest-price companies, and buying 1000 shares of 15np stocks.

If executed properly, this strategy results in a constant, no-frills 2000-3000 np/day. Yes, most of your stocks will be in the red most of the time; but when they jump above 15 (which will happen eventually), you'll sell them off properly.

To make this strategy more robust, check the history on NeoDaq.com; figure out if 15np is a low-price for the stock (that is, the stock's history is in the 17-22 range) or a high-price for the stock (that is, a history in the 8-13 range) and only buy from the low-priced stocks. You may have to invest your money in the 15-20 np range, but the idea is roughly the same.

High-Level Investment

The 1000-stock limit, in fact, forces you to invest in the higher-priced stocks if you want to make the real big bucks. The issue is this: If I am limited to buying 1000 stocks from the get-go, I want to buy stocks that will raise by 10 np, not by 2np. Then I will get 10,000 np, and not 2,000 np.

Where are these high-variability stocks? They are at the high price ranges. So when you get to the hundreds of thousands of np, you will want to invest them in the 100-500 np stocks, so that you can get high absolute returns -- even if they are low percent returns.

Theoretically, if the percent return gets below a certain value, the bank is a better place to put your money. In practice, however, playing the high-risk game on the stock market works better. This is because the absolute maximum daily rate that the bank will give you is 12.5%/365 = 0.0342%. So, if a stock varies between ± N np each day, then it would have to cost roughly 3,000 * N np/share before you'd say "hm, I don't want to buy that." (The 3000 here is 1/0.0342% = 2,920.)

The bank's interest is really relatively crummy compared to the rest of the site. Even if you have 10 million np in the Ultimate Riches bracket, you only get 3,425 np per day. 3 games of Deckball and 2 of Pterattack and you've already got that much; to say nothing of games like Cellblock that you can play for 5000np/day, or Eliv Thade for 3000 np/day.

Stock Markets in Real Life

Why Firms Want Investors

Firms need to have money before they can get money -- as an example, if Alice wants to open a smoothie restaurant, she needs to have the money to buy oranges, an orange-juice squeezer, bananas, crushed ice, plastic cups, garbage bags, a trash bin, napkins, and of course a blender. She also needs to buy the fruit for in the smoothie -- let's start with, say, strawberries, mangoes, and blueberries. She also needs to rent or buy a building to sell the smoothies in, and she needs money in advance to pay the first couple wages, electricity bills, and the first bit of advertising.

To get this money, a firm will let people invest money in them. But the investors, naturally, are not altruistic saints looking for nothing in return; they want to get money. So, to make these investments work, an investor buys shares of stock in the firm.

In the informal example above, Alice funds her smoothie restaurant by pooling with some friends. Her friend Bob is quick to jump on the venture and become her partner; her friends Carlos and Diane lend a bit of money but don't help out beyond that. So Alice and Bob contribute each, say, $400, and Carlos and Diane contribute $100 apeice. The first employees are Alice and Bob, and the $1000 total that they make covers everything.

Why Investors Want to Invest

As the firm progresses, it will hopefully turn a profit. (A profit is money made, minus money spent. So if Alice spends, per smoothie, $3, to get the fruit, pay the electricity, and, of course, to pay herself and Bob a wage, she might then sell the smoothie for $4 (or however much she can get for it). Then $4 is the revenue, $3 is the cost, and she has made a $1 profit. Not all companies turn a profit immediately; see, for example, the dot-com bubble.)

A firm that has turned a profit may then do one of three things:

1. Reinvest the profit in itself.
2. Pay the shareholders a dividend of the profit.
3. Buy back some of the shares of stock.

If A&B Smoothies above decides to reinvest, then they are, say, buying a new blender and paying some new workers there, and maybe they start to buy pomegranates for pomegranate smoothies. Reinvesting is, in general, when a firm decides to spend money on things that they think will help turn a later profit.

On the other hand, if at the end of the year Alice and Bob have made, say, $500 profit, they might spend it in dividends -- they might pay $200 to Alice, $200 to Bob, $50 to Carlos, and $50 to Diane. This is like interest on the investment; and dividends are often used to make people feel good about investments they've made. (Carlos, for example, now has $50 extra cash; and the corporation still owes him the original $100. The $50 makes him feel good about the investment he made, and all the better, because it's not coming out of the original $100 that the corporation owes him.)

(Neopian corporations never seem to pay dividends.)

On the other hand, they might buy back some shares. They might buy back both Carlos's share of stock and Diane's share of stock for $120. Then they have $260 left of their $500 profit to reinvest in the company, and afterwards, they never need to feel obligated to give Carlos or Diane anything more from this company; they already paid the two back.

Notice the difference in how Carlos is treated between stock dividends and stock buyback. In both circumstances, he gets money. But with dividends, he doesn't lose his stock. This is very important, because stock represents ownership in a company. Carlos has one fourth the right of Alice to dictate just what he wants to see done in the company; and if Alice wants to put yogurt in the smoothies while Bob wants to keep them vegan, Carlos and Diane may have votes sufficient to tip the balance of policy one way or another.

These votes are one of the final reasons that investors buy stock. If the stock shares are sold at $1/share, then Alice has 400, Bob 400, Carlos 100, and Diane 100. The shares give each of the investors some voting power over the A&B Smoothies restaurant.

(Neopian companies never give you these decisions. If you prefer it put this way, the Neopets stock market is so incredibly huge that no matter how many shares you buy, your vote will never be sizeable enough to matter. It's sad, but it's completely understandable why they did it that way.)

Where Stock Markets Come Into This Picture

Firms may (or may not!) decide to let their stocks be traded on a public market. This is called going public.

Why a Firm Might (or Might Not) Go Public

On the one hand, firms often want to get investors to invest; that way, they get more money to play around with in their quest to turn a profit. And the public market is very attractive to investors, because it lets them sell stocks whenever they want, to other investors. On the other hand, since stocks represent the ownership of a company, Alice and Bob may not want to put the ownership of their smoothie shop on the public market.

Here's an example to illustrate that, again, with A&B Smoothies. Suppose that eventually, they attract many new investors, each buying 100 shares of stock; they get 10 other investors who each buy 100 stocks in their company.

If Alice and Bob decide to go public with their stocks, then other people might be willing to pay more for the stocks sold by the company. After all, before they weren't paying for the right to sell the stock whenever they wished; but now, they are, so the stock is more valuable to own. (This can have a huge impact. By and large, most investors invest in the public market; so you're opening up the playing field to a huge amount more demand -- and hence a much higher price.)

But suppose that some crazy old coot, Edward, sees A&B Smoothies on the public market. He negotiates deals with the 20 other investors and builds up 1000 stocks in the restaurant. (Really, he only needs 901 to have the majority of the firm's stock and make all the crucial decisions by himself.)

Now, Edward is the chief owner of A&B Smoothies, and he can now decide, "Hey, I want A&B Smoothies to make Steak Smoothies," much to the horror of both Alice and Bob! Firms that go public may be taken in new directions, directions that their present shareholders don't want. On another hand, maybe Alice and Bob aren't comfortable with the remaining 1000 shares being off in limbo, changing hands every hour. For either reason, they might both pool together to put 800 votes against the company going public, and as long as they can convice more than 20% of the remaining shareholders to vote against it, they can block any attempts to go public.

What Happens in the Public Market

Investors like the public market because they can sell their stocks whenever they want. But this freedom to sell also creates a rather dynamic buying-selling community, because anybody can look at any stock and say, "I think other people will get interested in that stock and then I can make a quick buck off of it."

This is a form of gambling (more precisely, it's a game of skill heavily dependent on chance behaviors), and it is maintained as legal because the stock market makes complete sense legalistically-speaking.

So this is the gambling that you're up to: making a quick buck off of the stock market by watching the stocks for when they go low, then buying, then watching stocks when they get high, then selling.