Intro. to the Stock Market.doc


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Intro. to the Stock Market.doc

  1. 1. Teaching Strategies/Activities Financial Services CIP No. 52.0800 Activity 3. Introduction to the Stock Market COMPETENCY 14.0 ANALYZE TYPES OF SECURITIES AND RELATED INVESTMENTS 15.0 DEVELOP A FINANCIAL PLAN DURATION: 4-6 hours DESCRIPTION AND INSTRUCTIONAL/ WORK SETTING In this activity, students learn fundamental information and terminology about the stock market. Students will participate in a long term project that teaches them how to track stock and record a stock’s progress on a flow chart. This project can be started in the beginning of the term and continued over several weeks or months, depending on the interests of the students and the instructional schedule. OBJECTIVES: After completing this unit, the student will have demonstrated the following skills: 1. Compare different investment tools. 2. Demonstrate how to: locate and read a stock quotation and build a chart detailing the stock’s movement in earnings/losses over a period of time. 3. Describe the procedures for the purchase and sale of stock. 4. Figure the true cost of a share of stock. 5. Compare the value of stock issues. ACADEMIC INTEGRATION This activity addresses a significant number of academic skills. 1. Students will read and analyze information about investments from the newspaper. 2. Students will calculate price per share, profits/losses, dividend rates and other pertinent mathematical calculations regarding stocks. 3. Students will discuss the relationship between market movements and events occurring in the country/world. 4. Students will graphically chart the price of stocks and use the information to determine trends in the economy. TERMS AND DEFINITIONS FOR THIS ACTIVITY It is important that students gain a working knowledge of a variety of terms relating to the stock market. Check the glossary for terms students should use with this activity. These include: 1. Broker 2. Common Stock 3. Dividend Teaching Strategies for Financial Services, Page 1 of 15 Activity 3. Introduction to the Stock Market
  2. 2. 4. Insider Trading 5. Preferred Stock 6. Stock 7. Stock Exchange Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market USING SUPPLEMENTAL REFERENCE RESOURCES Collect educational packets/materials from stock brokerages that detail types of accounts, stock prospectus documents, year end statements from corporations and marketing materials. USING COOPERATIVE LEARNING Students can be placed in group to practice locating and reading the stock quotes in the financial section of the newspapers. Teams of students can select and track stocks over a specified period of time and compare gains/losses with the other class groups. Teaching Strategies for Financial Services, Page 2 of 15 Activity 3. Introduction to the Stock Market
  3. 3. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market INFORMATION SHEET #1 STOCK AND STOCK EXCHANGES WHAT IS STOCK? When a corporation wants to raise capital for business start-up or expansion, it will offer shares of stock for sale to the public. This increases the company’s reserves and gives it the necessary funds to operate. An individual purchaser then becomes an owner of a portion of that company, based upon the number of shares purchased compared with the number of shares that make up the company’s total stock offering. Common Stock is voting stock. Owners of this type of stock may vote for the officers of the company and its board of directors. Preferred Stock has preferential position over common stock. If a dividend is to be paid to share holders, it must first be paid to preferred stock owners before common stock holders. The cost of each share is based on the Book Value of the company and the number or shares in the market. To determine book value, a company will have an audit performed to detail its assets and liabilities. That value then is expressed as per share amount. The sale price of the share is determined by a combination of book value and market demand. If the company is seen by the public to have a strong future with good products, solid sales for its products or services, good leadership and a firm control over costs of operation, then the price per share is seen as good. As buyers become interested in the stock, the price rises. However, if the opposite is determined, then the stock’s price will fall. It should be noted that the prediction of stock price rises and falls can be tricky. The stock markets react to current events in the country and the world, competition from other companies and the emotional whims of people. STOCK EXCHANGES Nationally and internationally, stocks are traded on several exchanges. The size of the corporation and the location of the company’s headquarters determines whether the company is traded in the United States or overseas and on which exchange it is traded. Our discussion will be centered around the major exchanges in the United States. Teaching Strategies for Financial Services, Page 3 of 15 Activity 3. Introduction to the Stock Market
  4. 4. Stocks are traded by licensed brokers who work for stock brokerages. The stock brokerage pays a fee to the exchange to maintain a seat there for the privilege of buying and selling securities. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market New York Stock Exchange (NYSE) The New York Stock Exchange (NYSE) is the main stock exchange, in this country. About 80% of the volume of all stock transactions are executed on this exchange. The NYSE has a trading floor where the buy and sell orders are executed by registered traders. Most traders represent brokerage firms and execute only their customer’s transactions. Other traders can execute transactions for multiple firms. The largest companies have their stock listed on the New York Exchange. These companies must satisfy requirements regarding: earnings, size, the number of shareholders who own their stock and the number of outstanding shares. Each company pays a fee to be listed on the exchange. Smaller stock exchanges include: the American Stock Exchange, the Midwest Stock Exchange and the Pacific Stock Exchange. All of these exchanges have trading floors. Over-The-Counter Market (OTC or NASDAQ) This market is more commonly used by smaller corporations with about 5000 different companies’ stocks being traded. Transactions are executed by traders through a telecommunication network rather than on a trading floor. This system provides immediate stock price quotations. No trading floor is necessary. The National Association of Security Dealers have automated the process to provide instant price quotations. This Market is also referred to as: the Over the Counter Market. Regulation of Stock Exchanges In 1934, the Securities and Exchange Commission (SEC) was created to regulate stock exchanges and transactions. The Commission enforces specific trading rules to protect customers and to prevent unethical trading activities. Every exchange and stock broker closely adheres to the rules and regulations of the SEC; failure to do so will result in the suspension of licenses of both individual stock brokers and the trading companies they represent. All trades must be overseen by a licensed broker. Written exams are give to people who want to be brokers and there are separate exams for the types of securities to be sold. Background checks, including fingerprint checks, are also completed on individuals who want to be licensed brokers. Any criminal activity, Teaching Strategies for Financial Services, Page 4 of 15 Activity 3. Introduction to the Stock Market
  5. 5. including minor infractions of the law, like traffic misdemeanors, can affect an individual’s ability to obtain a license. The types of activity that the SEC guards against includes: insider training. Insider Trading is a transaction -- buy or sell, initiated by people who have prior knowledge of an immediate change in a company’s financial standing that has not yet been made public. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market The unpublished information would give brokers an unfair advantage over the general public in the trade of the company’s stock. Insider information is another term that describes this condition. Stock Indexes Most financial news for a given day is obtained from financial indexes that are published in newspapers. Daily publications such as the Wall Street Journal, Investors Daily, as well as regular daily newspapers publish the latest stock trading information for the various exchanges. Here are a few of the standard indexes: 1. Standard and Poor (S & P) --- the 500 largest firms are listed on this index 2. Dow Jones Industrial Average (DJIA) --- the 30 large industrial firms that make up the daily Dow Jones Average that describes the market trading for the day 3. Standard and Poor (S & P) 600 Small Cap --- this index publishes 600 small publicly traded companies 4. NASDAQ 100 --- this index lists the 100 firms that are traded on the NASDAQ exchange. Teaching Strategies for Financial Services, Page 5 of 15 Activity 3. Introduction to the Stock Market
  6. 6. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market INFORMATION SHEET #2 TYPES OF BROKERS Full Service Brokers Traditionally, the stock market has relied on full service stock brokers who have personal relationships with clients to recommend the purchase and sale of securities based upon the client’s needs. The broker would keep the client informed on stock movement, research stocks and recommend purchases and sales to their customers. Written information would be distributed to customers through the brokers and the brokers handled all transactions. Brokers would be paid a commission on each purchase or sale of stock. Examples of full service brokers include: Merrill Lynch and Dean Witter. Discount Brokers This form of stock broker is a relatively new addition to the brokerage business. With discount brokers, the firm executes a customer’s transaction, but does not give advice to the customer regarding the purchase or sale of the security. Customers assume the responsibility for researching the market, defining their own parameters for risk and investments and selecting the individual securities to be traded. Generally, the commissions are lower than for full service brokers. If requested, discount brokers can provide clients with printed information about various stocks. An example of a discount broker is: Charles Schwab. Other Types of Transaction Services The latest form of trading can be done electronically by customers. Through the use of computer on-line services, customers can initiate their own buy and sell orders. Each transaction is then confirmed by a broker representative from the on-line service. Commissions are extremely low and the full responsibility for research falls on the customer. This form of transaction should be reserved for the more sophisticated and knowledgeable customer. Teaching Strategies for Financial Services, Page 6 of 15 Activity 3. Introduction to the Stock Market
  7. 7. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market INFORMATION SHEET #3 STOCK PRICING 52 WEEK CYCLE VOL HI LOW STOC SYMBOL DIV YLD PE IN 100S HI LO CLOSE CHANGE 129 83 IBM IBM $1.40 1.2% 19 17.9987 114 113 113 -1 To determine the value of a stock, certain fundamental information is needed. Potential stock customers must relate the true value of a stock in comparison to its market price. To figure this, the investor must decide whether the stock price is a true representation of the value of the company on a per-share basis. For example: if a firm is valued at $600 million ($600,000,000.00) and has 20 million shares, its stock price would be calculated like this: STOCK PRICE = VALUE OF FIRM NUMBER OF SHARES = $600,000,000.00 20,000,000 Shares = $30.00 per Share Price Price is always figured on a per share basis, even though transactions are generally completed in round lots, or multiples of 100 shares. Odd lots are less than 100 shares and may be subject to a higher transaction fee. Reading Stock Quotations Stock prices are always quoted on a per-share basis in an index. Each stock has a specific symbol that is used to identify the company. The symbol is usually composed of two or three letters of the company name. In the example given, IBM’s symbol is IBM, Home Depot’s symbol is HD and Motorola’s symbol is MOT. Teaching Strategies for Financial Services, Page 7 of 15 Activity 3. Introduction to the Stock Market
  8. 8. The stock quotation will show the symbol and the price, expressed in whole numbers and fractions, if needed. For example: IBM 129, means that the current price of IBM is $129.00 per share and it is down in price by $1.00 a share. If the price was higher, the price would have had a (+) with the appropriate fraction of price change. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market Dividends Dividends represent the distribution made to stockholders over the last year on a per share basis. It is usually quoted in annual terms, but paid out quarterly to stockholders. To determine how much a dividend check will be per quarter, the investor can take the total dividend and divide by four. For example: If IBM pays $.25 a share dividend a year, for one quarter, the dividend per share = $.0625. Multiply the dividend by the number of shares owned and the investor will know how much IBM will be paid out quarterly. To determine the total dividend dollars paid to investors, the number of outstanding shares is multiplied by the dividend per share. Volume Volume or the number of shares traded on the previous day is commonly provided within stock quotations. The volume is normally quoted in hundreds of shares. In the example given, under VOL IN 100S, the number 17.9987 is listed. This equates to 17,998,700 shares of IBM that were traded the previous day. MEASURING THE RETURN ON STOCK Stockholders can earn a return from a particular stock through a dividend or increases in the stock’s price. Over a given period of time, the return to stockholders is measured by: RETURN = (SELLING PRICE - PURCHASE PRICE) + DIVIDENDS PURCHASE PRICE = ($44.00 - $40.00) + $2.00 $40.00 = .15 or 15% Dividend Yield (YLD) is the annual dividends per share expressed as a percentage of the stock’s prevailing price. Example: Dividend Yield = Dividends Paid per Share Prevailing Stock Price = $4.00 Annual Dividends per Share Teaching Strategies for Financial Services, Page 8 of 15 Activity 3. Introduction to the Stock Market
  9. 9. $80.00 = 5% Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market Price-Earning Ratio Most stock quotations disclose the stock’s price-earnings (PE) ratio, which represents the company’s prevailing stock price per share divided by the firm’s earning per share. Example: A Stock is presently at $80.00 per share; its earning over the last year were $80.00 per share; the stock’s price-earnings ratio is: Price-Earnings Ratio (PE) = Stock Price per Share Earnings per Share = $80.00 $10.00 = 8.0 The price-earnings ratio is closely monitored by some investors who believe that a low PE ratio (relative to other companies in the same industry) signals that the prevailing stock price is too low, based on its earnings. The stock may be perceived as undervalued and considered a good buy. Teaching Strategies for Financial Services, Page 9 of 15 Activity 3. Introduction to the Stock Market
  10. 10. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market NAME ___________________________________________ ASSESSMENT #1 VALUATION OF STOCKS VOL HI LOW STOCK SYMBOL DIV YLD PE IN100S HI LO CLOSE CHANGE 45 43 ½ Home Depot HD $.40 1.5% 5 6.54 52 42 44 +1 Using the information given in the chart, answer the following questions. 1. What is the name of the stock? 2. What is the symbol? 3. What was the highest price that the stock had in the last year? 4. What is the change in price for a share of stock? 5. Figure the quarterly pay out in dividend for 100 shares of stock. 6. How many shares of stock were traded? Short Answer: Compare the services between a Full Service Broker and a Discount Broker. Teaching Strategies for Financial Services, Page 10 of 15 Activity 3. Introduction to the Stock Market
  11. 11. What is the role of the Security Exchange Commission? Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market NAME ______________________________________ ACTIVITY #1 STOCK MARKET GAME OBJECTIVE: This activity can be ongoing, spanning a period of one week to six months. Students will analyze and chart movements in stock and discuss the causes for the movements. EQUIPMENT AND SUPPLIES Daily Newspapers with Stock Market Information Listed Graph Paper Colored Pencils Clear Cellophane Tape Small Prizes for Group Winners DIRECTIONS Divide the class into teams of two/three students. Each team will select companies to invest in, based upon individual preferences as well as financial information. The total investment per team should equal $10,000.00. On graph paper, the students should build a graph for each stock based upon the information for the high/low trading over the last year. Build the graph in 1/8 of dollar increments. Hang the graphs on the wall. Remember to allow space between the graphs so that the students can work on the graphs. Using a different color to represent each stock, the students will place the opening price for each stock on the graph. Once a week, the students should read the stock quotations from the newspaper and chart the changes in stock pricing. Class discussion concerning events that influenced the change in stock prices are necessary. At the end of the time period, compare the results of the groups. Award prized based upon results. Teaching Strategies for Financial Services, Page 11 of 15 Activity 3. Introduction to the Stock Market
  12. 12. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market ASESSMENT #1 VALUATION OF STOCKS Answer Key: 1. Home Depot 2. HD 3. $52.00 4. Up $1.00 5. $10.00 in dividend per quarter 6. 6,540,000 shares Short Answer: Full Service Broker-- Informs clients of stock movement Researches stock purchases and sales Handles all transactions for clients Higher commissions Discount Broker-- Executes transaction Does not offer advice Sends out written information to client only upon request Does not develop the personal relationship with clients Lower commissions Security and Exchange Commission-- License brokers Protect public from unscrupulous business practices Teaching Strategies for Financial Services, Page 12 of 15 Activity 3. Introduction to the Stock Market
  13. 13. Teaching Strategies for Financial Services Activity 3. Introduction to the Stock Market RESOURCES Computer Reports: Smart Investing. Video. Calhoun, KY: NIMCO, 1997. Funding the Business with Stocks & Bonds. Video. Calhoun, KY: NIMCO, 1997. The Marketplace. Video. Calhoun, KY: NIMCO, 1997. Mutual Funds. Video. Calhoun, KY: NIMCO, 1997. Pass Track 6 Principles & Practices: Investment Company/Variable Contracts, Limited Representative. 17th Edition. Chicago, IL: Dearborn Financial Institute, Inc., 1996. Stock Markets: A Share in the Market. Video. Calhoun, KY: NIMCO, 1997. Understanding to Business World & Stocks. Video. Calhoun, KY: NIMCO, 1997. Teaching Strategies for Financial Services, Page 13 of 15 Activity 3. Introduction to the Stock Market
  14. 14. Teaching Strategies for Financial Services Lesson 7 Class Investment Clubs The members of your class decided to form investment clubs. Class members may buy as many shares in a club as they like, for $10 per share. Each club sold 300 shares and collected $3,000. Now it’s time to invest the money. Your club held its first meeting and decided to invest in stocks. The club members proposed different stocks to buy. Here is a rundown on the stocks proposed. 1. American Cellular, $5 per share This is a new cellular company that features high-tech services such as phones that send streaming video. So far, the company has not made a profit but expects to do very well soon. 2. Big Box Stores, $20 per share Big Box Stores is one of the leading discount retailers in the country. Same-store sales have increased steadily in each of the last five years. 3. Biotech Industries, $10 per share Biotech Industries is a pharmaceutical company that specializes in developing cutting-edge drugs. It has some profitable products, but so far its profits are small. 4. General Grocery, $20 per share This is a leading grocery store chain. Sales are generally steady and do not change much with the economy’s ups and downs. However, some experts predict that the growing trend toward eating out in restaurants will hurt future sales. 5. Giant Auto, $10 per share Teaching Strategies for Financial Services, Page 14 of 15 Activity 3. Introduction to the Stock Market
  15. 15. Giant Auto is one of the three leading automobile manufacturers in the world. The company’s profits depend on economic conditions. Profits are high in times of strong economic growth and poor in bad times or recessions. 6. Gold Mining Group, $5 per share GMG is a gold-mining company. The price of gold often rises in bad times or recessions and falls in good times. Your club decided to invest all 300 shares or $3,000 in at least three of these companies. Decide how to invest the money and record your investments on the following worksheet. Company Price per No. of Shares Amount Share Owned Invested American Cellular Big Box Stores Biotech Industries General Grocery Giant Auto Gold Mining Group Total Investment Value (add last column) Number of Shares 300 *Price per Share $10 *The price per share is the amount invested divided by the number of shares. Teaching Strategies for Financial Services, Page 15 of 15 Activity 3. Introduction to the Stock Market