Objective
Students will be able to:
- Define stock, bond, corporation, firm, and IPO.
- Evaluate different stock purchases.
- Explain why diversification lowers investment risk.
Standards
In this economics lesson, students will learn how the stock market works by participating in a historical simulation.
Procedure
Warm-up
Tell students that today they are going to participate in a stock market simulation. Ask for a show of hands to see who is familiar with the stock market. Open the PowerPoint Slides and show Slide 1 on a projector screen. The slide deck has talking points in the notes section feature, view those as needed. Show slide 1 and ask students to talk with their neighbor or in groups for 1-2 minutes to come up with an explanation of what happens at the stock market. Call on several groups to share their explanations. Then, ask the class a follow-up question: What is a “stock”? It is a share of ownership in a corporation.
Modeling
Show slides 2 and 3. Use the speaking notes in the PowerPoint for talking points. Show slide 4 and explain to students that they are going to do a brief simulation of an IPO. Ask student the following questions:
- What do you think happens when a firm, such as Buffalo Wild Wings, sells a share of stock?
- What happens when an individual buys a share of stock?
Answers
- They sell a piece of ownership in the company.
- They buy a piece of ownership in the company.
Pre-cut the Stock and Bond Cards as well as the Money Cards. Ask for 4-6 volunteers, and give each volunteer a small handful of classroom money. Then, hold up one share of ABC Corporation common stock. Announce that ABC is a firm that sells popular new board games. The owners want to expand, so they are having an IPO. Offer to sell the stock in exchange for classroom play money. Exchange the paper stock certificate for money from one of the volunteers. Ask the volunteer the following questions:
- What did you buy?
- What is it worth?
Answers
- A stock, part ownership in the firm.
- The student will likely say whatever dollar figure they paid for it.
Show slide 5. Explain that the share is only worth whatever someone is willing to pay for it. Most people buy and sell existing shares of stock in the secondary market instead of directly from the company. The stock price may rise or fall for a variety of reasons. For example, stock buyers may offer higher prices if the company is earning high profits, if it secures a patent on a new product, or because the economy is doing well and more investors are buying stock. Prices may fall because shareholders want to get rid of their stocks due to bad news, such as a liability lawsuit or lack of demand. Ask the class, “How can individual investors earn money in the stock market?” Answer by saying, “There are basically 3 ways: buying stock at a low price and selling it at a higher price, by earning dividends (share of profits from the company), and by short selling (see mini lesson on short selling below).
Show Slide 6 and use the speaking notes to guide you. Pose the following questions for review:
- Why do corporations sell stocks?
- What is the process of selling stock to the public called?
- Who sets the price of a share of stock?
- Why do individuals buy stock in corporations?
- What happens if the price of a stock goes down?
Answers
- To be able to raise money to expand.
- An Initial Public Offering.
- The market interaction of buyers and sellers.
- Because they hope the price will go up, and because they can earn dividends.
- The individual buyer will lose value and possibly lose money.
Group Activity
Show Slide 7 and use the speaking notes to help guide you explain how to play the Stock Game. Show Slide 8 as an example of the kind of visual the students will see in the game. Show slides 9 – 11 using the speaking notes to review graphing trends. Display Slide 12 for instructions on how to log-in to begin the Stock Market Simulation. Show Slides 12-14 for a walk-through of the app. Ask students to return to their groups and log-in to the Stock Market Simulation and select their first investments.
Use the Guiding Questions handout to discuss or highlight the points you wish to emphasize with your class. Announce that now it is Sept. 23, 2002. This was a low point in the stock market after the dot-com bubble burst. Show Slide 16 listing September 23, 2002 prices for all of the stocks they have purchased. On the Teacher Dashboard page, change the date to September 23, 2002, and tell students to refresh their page. The stock prices will automatically adjust.
Use the Guiding Questions handout to discuss or highlight the points you wish to emphasize with your class. Announce that now it is Oct. 1, 2007. This was a high point in the stock market before the financial crisis. Show Slide 17 listing October 1, 2007 prices for all of the stocks they have purchased. On the Teacher Dashboard page, change the date to October 1, 2007, and tell students to refresh their page. The stock prices will automatically adjust.
*If online access is not available, use the Stock Market Simulation Activity and Transaction Record. Skip Slides 10-13. Instead, show Slide 14, which shows the Activity 4 portfolio sheet where students will record their stock purchases. Pass out Activity 3 and Activity 4, one copy per group, and calculators and pens, as needed. Use the speaker notes on Slide 14 to help explain where students are to place information. Circulate the room during this activity to check that students understand the procedure. Collect the Activity 4 Transaction Records from each group at the close of class. Then, when you get the procedures on slides 16 and 17 simply give each group time to record their do the calculations.
Individual Activity
Students are going to calculate a rate of return for their investments. Pass out calculators as needed. Define rate of return as the earnings from an investment, stated as a percentage of the amount invested. Explain that first you will calculate a total return on the investment, then an annual rate of return.
Show Slide 18 and use the speaker notes if necessary to explain how the calculations work. Have students calculate their own total return on investment, comparing the 2007 value of their portfolio (including bonds and cash) to the $100,000 they started with. Ask several students to share their return on investment. (Answers will vary.) Hand out Stock Market Calculations to each student. Explain that they will use this sheet to calculate their group’s rate of return for each type of investment (stocks, bonds, cash) and their overall investment “portfolio” in 2002 and again in 2007. Give students time to perform these calculations and circulate to help as needed.
Explain that this simulation was designed to show them the long-term ups and downs of the market. In this simulation, all of the stocks picked were for corporations that endured the recession – none of them went bankrupt. Although some of the stocks lost money, the simulation was biased toward students earning gains over the long term. Remind students of the McClatchy graph (Slide 5) and that some stocks drop and never recover. If they are considering buying stock in a company, it is important to understand what is happening in the industry, such as Internet replacing print media. Although stock trading can bring large returns, they should not underestimate the risks.
Assessment
Distribute a copy of Buy and Hold: A Stock Market Quiz to each student. Have the students complete the quiz and hand-in their answers. Use the Stock Market Quiz Answer Key to check the answers.
Extension
Activity 1
Print a copy of Short Selling Script and carefully read pages 1 and 2 to understand how to conduct the activity. Inform students that people can sometimes make money when stocks lose value as well through short selling. Students will be participating in a role-play activity. Hand out copies of the script to all students. Select four students that are willing to portray one of the roles in the skit.
Activity 2
Break class into groups. Open the Stock Market Lookup PowerPoint slides and project the slides on a screen. The slides show the students how to get the dates needed for looking up historical stock info. Have students visit Yahoo Finance Symbol Lookup to find the current price of each of their stocks. Ask each group to enter DIS to look up the stock Disney. Ask students to share their total returns on investment. Answer will vary. Some students may have losses, others may have 100% or more in gains. Ask students to share their annual rates of return. Again, answers will vary. 5-10% is fairly typical with these stocks in this time period. Pick the winning team by rolling a die to determine the ending date of the game. If you roll a 1 or 2, the game ends in 2002. 3-6, the game ends in 2007. (If students looked up current data, you can use a roll of 5 or 6 to end the game with today’s date). Roll the die to determine the ending date. The purpose of ending on a random date (rather than the current date) is to reduce the ability of students to pick stocks based on current (hindsight) knowledge about stock prices.
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