Economize: To base decisions on an assessment
LESSON 14 of costs and beneﬁts, choosing the best com-
HOW TO CHOOSE bination of costs and beneﬁts from among the
A STOCK Growth Stock: A stock whose earnings and
price are expected to show big increases in
INTRODUCTION Income Stock: A stock that has paid sizable
In this lesson, students match stock selections to dividends in the past and is likely to do so in
stock purchasing strategies; they gain experience the future.
in ﬁnding the company that produces a particular Industry: A group of companies that produce or
product and in identifying the parent company of sell the same kind of product or service.
a particular business.
Late Phase of Development: The condition of
ECONOMICS BACKGROUND a company whose product or service has been
Like everybody else, people who buy stocks face on the market for awhile, and its sales are no
scarcity. Their money is limited, so they must longer expected to grow rapidly.
choose among stocks. In choosing, they try to Long-term Investing: Buying stock and keep-
weigh potential costs and beneﬁts, hoping to max- ing it for many years in an effort to have one’s
imize the beneﬁts. They rely heavily on various money grow in step with stock prices in gen-
types of information about the stocks they consid- eral.
er, and they pay a cost (in money or effort) to Parent Company: A business that owns and
obtain this information. Information about eco- controls another company.
nomic expansions and contractions is especially
Recession: A decline in Real Gross Domestic
Product (GDP) for a period of at least six
months. During a recession, businesses pro-
LANGUAGE OF ECONOMICS duce fewer goods and services.
Capital: Human-made resources used to produce
goods and services. Capital goods are used by Risk: The chance of losing money. Risk is the
people to produce and distribute goods and opposite of safety.
services. Short-Term Investing: The buying of stocks in
Cyclical Stocks: Stocks, such as high-priced order to sell them quickly in an effort to have
consumer goods and capital goods, that are one’s money grow faster than the general level
signiﬁcantly affected by business cycle ﬂuc- of stock prices.
tuations. These stocks generally decline more Stock Table: An alphabetical listing of the
during recessions and show more growth dur- transactions on the stock exchanges.
ing expansions, than other stocks.
Defensive Stocks: Stocks, such as medicine, CROSS CURRICULUM SKILLS
food, clothing, and public utilities, that are Students develop skills in writing, speaking,
relatively unaffected by business cycle ﬂuctu- reading, and group participation.
ations, generally decline less during reces-
sions, and show less growth during OBJECTIVES
expansions than other stock. 1. Students describe strategies for stock selection
Dividends: The amount of proﬁt a company pays as they identify factors that might result in
to its stockholders. greater beneﬁt than cost.
Early Phase of Development: The condition 2. Students analyze stock choices and identify the
of a company that puts a product or service appropriate stock selection strategies.
on the market for the ﬁrst time; its sales are
expected to grow rapidly.
3. Students identify the company that produces a about what we might look for when choosing
particular product and the parent company of a stocks.
D. Tell students that they are now going to exam-
4. Students identify characteristics of economic ine strategies that others have suggested for
cycles and predict the inﬂuence of cycles on reducing the risk involved in buying stocks.
consumer choices and stock performance. Distribute Activity 1, Strategies for Stock
Selection. Read and discuss each section. Tell
MATERIALS students that there are many other strategies,
x Visuals 1 and 2 but these examples should get them started.
x Activities 1, 2, 3*, 4*, and 5*
x Newspaper stock tables Answers to Activity 1
1. What is Peter Lynch’s advice for picking
TIME REQUIRED stocks?
Two class periods (Buy what you know. Stock tips are all
around us. You can spot a good stock before
PROCEDURE Wall Street does.)
A. Now that the students have decided to invest
in the stock market, they need a few tips on 2. Give an example of a stock that you think
selecting stocks wisely. Remind the class that has a growing market.
there are costs and beneﬁts involved in any (Answers will vary.)
decision, including decisions about stock
selection. This lesson will help them select a 3. What is an example of a good stock to buy
stock and ﬁnd the name under which it is in a recession?
traded. To select, they need a strategy. (A stock in a defensive industry such as
Explain that a strategy is a way of methodi- medicine, food, clothing, public utilities.)
cally pursuing a goal. A strategy is a way of Example of a good stock to buy in an
reducing risk. expansion?
(A stock in cyclical industries such as cars
B. Ask the students to imagine for a moment and appliances, or raw materials like alu-
that buying a stock involved no risk. Ask: minum, steel, tools, and equipment.)
What are the characteristics of a perfect
stock? Encourage some speculation. Display 4. Why should you beware of front-page stories?
Visual 1, Wombat, Inc. Would this company (If the stock is news, then everyone else
be a good choice? Discuss each characteris- knows about it.)
tic, encouraging students to explain why these
factors tend to make this a perfect choice. 5. Explain how changes in technology affect
(There must be a market for the product; if peo- stock prices.
ple are buying the product, especially if they buy (Changes in technology could make the prod-
lots of it, the company will do well, the stock will uct obsolete, thus depressing the stock’s price,
be valued, and the price will rise. The company or changes could increase demand for the
will probably have higher proﬁts since the cost of product, thus increasing the stock’s price.)
distribution and production, the major determi-
nant of supply, is low. The expected long life of E. Ask students to use the Peter Lynch strategy of
the company and excellent earnings will support “buy what you know.” Ask the students to
the value and price of the stock.) name a product or service that they think is as
good as or better than other products or ser-
C. Explain that Wombat, Inc. is not a real com- vices on the market. When they have come up
pany, and no company has all these charac- with several examples, settle on one or two to
teristics, but the example helps us to think examine further. Display Visual 1 again and
146 *These activities are adapted from The Stock Market Game Guide, published in 1990 by the Securities Industry Foundation
for Economic Education, Inc., and used here with permission.
ask students how this product or service com- 4. Kellogg’s, Wisconsin Valley Electric
pares to the ﬁctional Wombat, Inc. Then dis- Company, GM
play Visual 2, Strategies for Stock Strategy: Economic Cycle—Not so good
Selection—Summary, a summary of the read- times and Defensive stocks.
ing. Ask students to take the product or ser- Reasoning: During periods of recession,
vice they selected through each of the Kellogg’s and Wisconsin Valley Electric
considerations in stock selection. For example, Company, both defensive stocks, generally
what are the current markets for this product? decline less than other stocks. However, GM,
Who will buy it? Can it be sold overseas? How a cyclical stock, would be likely to decline
would it fare in good times or lean times? more than stocks in other industries.
Discuss each question, then decide whether
the company warrants further research. G. Summarize Activity 2. Explain that when you
select a stock you are making a reasoned
F. Continue to display Visual 2. Distribute judgment, using information you deem impor-
Activity 2, Matching Strategies to Stock tant to maximize the beneﬁt and minimize the
Selections. Divide the class into groups. Ask cost. Since you have limited funds to invest in
students to read and discuss each statement. The Stock Market Game, you must choose and
For each statement they are to identify and give up your next best alternative. This is the
describe the strategy they would use. Would opportunity cost.
they buy the stock(s) or not? Explain. Ask
each group to report. Do students agree? H. In the next Activity, students will search for
Discuss their answers. stocks using newspaper stock tables, a brand-
name index, and a parent-company index.
Answers to Activity 2
Tell students that they will search for the
1. Widget Manufacturing Company names of companies that make many of their
Strategy: Avoid obvious risk—speciﬁc stock favorite products. This search is necessary
situation because if you can’t ﬁnd the listing in the
Reasoning: Although the technology factor stock market table, you can’t buy the stock.
is important, the risk of losing the lawsuit is
probably more important. I. Distribute copies of Activity 3, A seemingly
Simple Search for Selected Stocks, Activity 4,
2. WonderWalkers Brand Name and Parent Company Index, and
Activity 5, Stock Search Activity Sheet. Ask the
Strategy: Peter Lynch—Buy what you know;
students to read Activity 3 aloud. As a group,
read and discuss directions 1, 2, and 3, per-
Reasoning: Recognize a good product before haps doing a few of the tasks as examples.
everyone else; early phase of development
means markets could expand and sales J. Students might be unable to ﬁnd particular
could grow rapidly. stocks in the newspaper. For example, RJR
Nabisco was purchased by Kohlberg Kravis
3. GM Roberts & Co., so the stock of RJR Nabisco is
Strategy: Economic Cycle—Good times and not publicly traded. Consequently, students
Cyclical stocks will not ﬁnd RJR Nabisco in the stock tables if
Reasoning: During periods of expansion, they begin with a popular product, such as
automobile stocks, which are cyclical, are Oreo cookies or Ritz crackers, which is made
more likely to show greater growth than by Nabisco Brands, which is now part of KKR.
defensive stocks. People are more conﬁdent
about the present and future so they are The stocks of Pillsbury Company are no
more willing to make a large expenditure. longer traded because the business was pur-
chased by the British company, Grand
Metropolitan. Other companies may not be company debt [assets to liabilities ratio], earnings
publicly traded, so their stocks, too, will not growth over the past ﬁve years, high and low
be listed. And some, like Nintendo, are for- prices for the year [stock tables], and dividend
eign companies whose stocks are not traded in payments? Is it in the early or late phase of devel-
U.S. stock markets. Finally, the list of compa- opment? Are new developments in progress? What
nies in Activities 4 and 5 might require peri- other businesses does the company own? Is there
odic updating, for particular companies might diversity in the products they make? This informa-
be purchased by other businesses in the same tion would help you determine the ﬁnancial condi-
way RJR Nabisco was purchased by KKR. tion of the company, its markets, and potential
Ask students to look in their kitchen cabinets at What choices about daily expenditures and
home. Boxes of cereal or cans of vegetables will stock purchases do you think your parents, neigh-
give the company name and sometimes the parent bors, employers, and so on, would make depend-
company. For example, Nabisco Shredded Wheat ing on the economic cycle? For example, if the
is now one of the Post cereals, which is owned by economy went into recession, would they contin-
Kraft, which is owned by General Foods, which is ue to buy bread and milk? How about a new car?
owned by Philip Morris. Often companies furnish To learn more about this, prepare a set of ques-
800 numbers on their products, so students can tions and interview several adults. Be sure you
call to ask about parent companies. Ask students clearly differentiate between economic expansion
to add to the Brand Name and Parent Company and economic recession. Record people’s answers
index when new connections are discovered. and the reasons they give. Then write a report
explaining the impact of the economic cycle on
ASSESSMENT consumer and stock purchase decisions. Use your
data for examples.
Multiple Choice Questions
1. A business that owns or controls another JOURNAL
company is a(n) _______ company.
Choose an industry. Collect information about
a. brand name
the industry from the newspaper ﬁnancial pages,
magazines such as Business Week, and television
programs such as Wall Street Week and Nightly
Business Report. Record the date and source for
each item of information. Write a report describ-
2. Individuals selecting stock would need to
ing the industry, its products, companies in the
industry (successful and other), changes taking
a. economic cycle.
place—technological and political, domestic and
b. markets available.
global—and the probable future of this industry.
c. technological changes.
d. current industry conditions.
*e. all of these.
Your friend asks you for your opinion on buy-
ing American Manufacturing Limited stock. What
information would you need to know before you
could give a reasoned answer? Explain.
(You need to know what the company does and
whether it makes good products/services. How is
the company doing? How is the industry doing?
What are its current and future markets? What is
the ﬁnancial position of the company? What is the