Overview
In this lesson, students learn about stocks and understand what it means to buy stock in a company. They also learn that investing in a company's stock involves risk. Students read about stocks online and discuss the factors that make a company risky. They watch a segment from the PBS series What’s Up in Finance? to learn about one instance of risk at the corporate level. They then compare two companies with very different risk factors and discuss as a group why one company's stock would be much riskier to buy. As a culminating activity, students analyze three company profiles to determine which company's stock would be the riskiest to buy and which of the three stocks would be the least risky to purchase.
Objectives
Students will be able to:
- Understand the concept of risk
- Understand the concept of stock ownership
- Understand the importance of risk analysis
- Learn techniques for investment
- Understand the concept of profitability
- Learn how to compare companies to each other
- Learn how to analyze risk
Grade Level:
7-12
Suggested Time:
(3) 45 minute class periods
Media Resources:
The Dealmakers QuickTime Video
In this video from What’s Up in Finance? two teams of students from Nashville, Tennessee compete in a simulation of a multi-billion dollar business deal.
Materials:
Website:
What is Stock Anyway?
Before The Lesson
- Bookmark the Web site used in the lesson on each computer in your classroom. Using a social bookmarking tool such as del.icio.us or diigo (or an online bookmarking utility such as portaportal) will allow you to organize all the links in a central location.
- Preview all of the video segments and Web sites used in the lesson to make certain that they are appropriate for your students, currently available, and accessible from your classroom.
- Download the video segment used in this lesson onto your hard drive, or prepare to stream the segment from your classroom.
- Print out the "Stock Investing Definition Teacher Organizer" to copy the terms and definitions on the board.
- Print out the Student Organizers: "Risk Factors," "Market Mover," "Company Profiles," and "Risk Analysis." Make enough copies so that each student has one copy of each organizer.
The Lesson
Part I: Introductory Activity: Setting the Stage
- Open the discussion by asking if any of the students knows what a stock is, or if they own any. Also, ask students if they have any interest in investing in the stock market.
- Next, using the Stock Investing Definitions Teacher Organizer, write on the board the following components of the loan: stock, share, shareholder, public company, risk, profit, market, and valuation. Discuss with the class what each of the terms means.
- Discuss how the stock market works. Explain that stocks are ownership in a company. By investing in stocks, you are essentially taking ownership of a tiny part of a company. The price of a stock is quoted and paid for in dollars. If the stock price goes up beyond what was paid for it, it can be sold for a profit. Earning that profit is the goal of stock investors.
- Explain to students that owning stocks is inherently risky because it is not always possible to predict whether the price of the stock will go up or down. Sometimes the price of a stock can move in unpredictable ways. Despite the inherent risk, however, stocks have traditionally outperformed bonds and savings accounts over time.
- Have students review the information on the What Is a Stock, Anyway Web site. As they review the site, ask them to think about what would make the price of a stock go up or down.
- Next, ask students to list factors that would make the price of a stock go up or down. Explain that the price of the stock will generally reflect the health of the company the stock represents. If the company is making a profit, the price of the stock will generally go up. (Some of the factors that will lead to a company being more profitable are: a successful new product, a popular market, and a change in management that makes the company stronger.)
- Expand on the idea of risks, or factors that might make a stock price go down. The main issue again is profitability: if a company becomes less profitable or actually loses money, it can push the stock price lower. Some of the risk factors in this area are: an unpopular product, increased competition, and poor management.
- Explain that there are also larger issues beyond the specifics of a company's performance that can impact stock prices. Notably, stocks move up or down due to factors in the national and global economy. Changing interest rates, threats of inflation or recession, and even oil prices in another part of the world are examples of factors that can affect stock prices.
Part II: Learning Activity
- Explain to the class that they will be watching a short video from What’s Up in Finance? on a competition where high school students analyze the risks of buying a company. Explain that one company is going to try to buy the other company, and ask the students to look for the different risks that both companies are considering as they decide whether or not the purchase should happen.
- Ask students to think about how the students in the video are analyzing the risks of the companies involved. Play The Dealmakers for the class.
- Review the video with the class, discussing with students why it was risky for Team Tesoro to join with Team Sunoco. (Answer: Explain that Team Tesoro was afraid its stock price would fall and its shareholders would lose money if it became part of a company that was not as strong financially.)
- Ask the students to explain why they think the decisions a company makes, as well as factors the company can't control, can influence the company's stock price. (Answer: Because companies are focused on being profitable, and there are many factors that impact profitability.)
- Hand out the Risk Factors Student Organizer. Ask students to read the risk factors listed on the organizer and to discuss why each of the factors might make a company either more or less profitable.
- Next, ask students to read the company descriptions on the organizer, and then start a discussion about the two companies. Organize the discussion by looking at each of the five risk factors for Company A and Company B. Ask students to explain which company is riskier on the basis of each factor, and why. (Answer: Company A is riskier on the basis of each factor.)
- Finally, hand out the Market Mover Student Organizer. Ask students to read the organizer, and then start a discussion comparing the stock price movement of the three companies.
- Ask students to identify which chart goes with which company, based on the stock price movement. (Answer: Tori's Toybox -- Chart B, Casual Cruiselines -- Chart C, Wholesome Unlimited -- Chart A.)
Part III: Culminating Activity
- Hand out the Company Profiles Student Organizer. Ask students to read carefully about each company. Have a short discussion about each company’s strengths and weaknesses.
- Hand out the Risk Analysis Student Organizer. Ask students to read through the grid and explain the rating system (1 - low risk, 2 -medium risk, 3 -- high risk).
- Explain to the students that they will be analyzing each of the risk factors that have already been discussed in class. They should consider each factor for each company, and then determine how much risk an investor buying stock in the company would be taking, for each of the factors.
- Ask students to complete the grid. Make sure that they know they have to provide a rating and an explanation for the rating.
- Discuss which company is the least risky and why. Ask students to explain their answers for each factor. (The Risk Analysis Teacher Answer Key is provided.)
- Reiterate to students that owning stocks is inherently risky because of the many variables that affect stock prices. It is not always possible to predict whether the price of the stock will go up or down, even if an investor has done a comprehensive risk analysis.
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