UNIT THREE – INVESTING AND THE STOCK MARKET TABLE OF CONTENTS Unit Three Plan ............................................................................................................................3 Summary and Description .............................................................................................................................. 3 Lesson Plan Sequencing ................................................................................................................................. 4 Performance Task(s) and Rubrics .................................................................................................................. 5 Lesson Plan 1: Investing Fundamentals .................................................................................... 7 U3LP1 Handouts ......................................................................................................................................15 Risky Business .................................................................................................................................................. 15 Lesson Plan 2: Investment Goals .............................................................................................16 U3LP2 Handouts ......................................................................................................................................22 Investor Time Horizon .................................................................................................................................... 22 Investment Match Up ................................................................................................................................... 25 Personal Assets .............................................................................................................................................. 26 Lesson Plan 3: The Stock Market .............................................................................................27 U3LP3 Handouts ......................................................................................................................................33 When Bubbles Burst ....................................................................................................................................... 33 Lesson Plan 4: Context and Connections ..............................................................................35 U3LP4 Handouts ......................................................................................................................................40 Sectors, Industries, & Companies ................................................................................................................ 40 My Company In Context .............................................................................................................................. 42 Lesson Plan 5: Stock Analysis (1) ...........................................................................................43 U3LP5 Handouts ......................................................................................................................................49 Exploring The Company’s Fundamentals ................................................................................................... 49 Sample Stock Table ...................................................................................................................................... 50 How To Read A Stock Table ........................................................................... 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Company Analysis Worksheet ..................................................................................................................... 52 Lesson Plan 6: Stock Analysis (2) ............................................................................................54 U3LP6 Handouts ......................................................................................................................................57 Apple Inc Stock Chart .................................................................................................................................. 57 My Stock Sheet .............................................................................................................................................. 58 U3: Investing and the Stock Market 2015-16 © Copyright Magnetar Youth Investment Academy 1 Unit Three Quiz ..........................................................................................................................59 Unit 3 Quiz – Answer Sheet ......................................................................................................62 U3: Investing and the Stock Market 2015-16 © Copyright Magnetar Youth Investment Academy 2 Unit Three Plan Summary and Description INVESTING & THE STOCK MARKET Students will develop a firm understanding of the concept of investing, learn about various investment vehicles, and learn specifically about the stock market, how it works, and how to analyze and select stocks. Big Ideas Unit 3 Lessons 9 Investment Goals 9 Investing Fundamentals 9 The Stock Market 9 Investment Goals 9 Risk 9 The Stock Market 9 Portfolio Management 9 Context and Connections 9 Stock Analysis (2 lessons) Jumpstart Competencies & Standards: Saving and Investing 9 Explain how investing builds wealth and helps meet financial goals. 9 Evaluate investment alternatives. 9 Describe how to buy and sell investments. 9 Explain how taxes affect the rate of return on investment. 9 Investigate how agencies that regulate financial markets protect investors. Common Core Standard(s) Integration of Knowledge and Ideas CCSS.ELA-Literacy.RST.9-10.7 Translate quantitative or technical information expressed in words in a text into visual form (e.g., a table or chart) and translate information expressed visually or mathematically (e.g., in an equation) into words. CCSS.ELA-Literacy.RST.11-12.7 Integrate and evaluate multiple sources of information presented in diverse formats and media (e.g., quantitative data, video, multimedia) in order to address a question or solve a problem. CCSS.ELA-Literacy.RST.9-10.9 Compare and contrast findings presented in a text to those from other sources (including their own experiments), noting when the findings support or contradict previous explanations or accounts. CCSS.ELA-Literacy.RST.11-12.9 Synthesize information from a range of sources (e.g., texts, experiments, simulations) into a coherent understanding of a process, phenomenon, or concept, resolving conflicting information when possible. U3: Investing and the Stock Market 2015-16 © Copyright Magnetar Youth Investment Academy 3 Lesson Plan Sequencing – Unit Three Investing Fundamentals This lesson covers the fundamentals of investing. Students compare and contrast different investment instruments, including stocks, bonds, and funds. Students will discuss an actual investment success story and then advise fictional characters on common investment mistakes as they learn basic investment concepts. Investment Goals Students will learn how investing can support short-, medium-, and long-term financial goals. Students will explore the use of different investment instruments and strategies to align with differing objectives and time horizons. The Stock Market This lesson covers the fundamentals of the stock market. Students will engage in a whole-class market simulation to learn how investment markets function and factors that drive prices. In this lesson, students will also learn about the different types of stocks in which they can invest. Context and Connections Students will discuss how industry context and other macro factors impact their stocks. Students will learn to interpret stock fluctuations and evaluate economic and business factors after selecting a stock. Stock Analysis (2 lessons) Students will utilize their credit-analysis experience from Unit Two and apply it to stock evaluation. Students will begin to read and interpret stock prices and stock charts using online and offline resources. Note: All Lessons Plans are roughly 90 minutes in duration. U3: Investing and the Stock Market 2015-16 © Copyright Magnetar Youth Investment Academy 4 Performance Task(s) and Rubric – Unit Three A rubric can provide a basis for self-evaluation, reflection, and peer review. Performance tasks can be shared with students at the beginning of each unit. The rubric provides a goal for students to achieve in the program. Students can decide where they want to fall on the rubric and use it as their guide. This allows them to take ownership of their learning and decide how far they want to go with the curriculum. Managing Director - 4 Student can list three or more types of investments, describe their risk level, and what their purpose is in an investment portfolio. 9 Student can list three or more types of investments. 9 Student can describe the risk level and the purpose of at least two types of investments in an investment portfolio. 9 Student can articulate 3 differences between saving and investing. 9 9 Student can list 4 savings vehicles and 4 investment vehicles. 9 Student can prescribe investment strategies that match specific investment goals with over 85% accuracy. 9 Investments Investment Goals 9 Investment DecisionMaking Portfolio Manager - 3 Student can identify at least 3 common investment mistakes, explain why the decisions are mistakes, and recommend alternative financial decisions in each case. U3: Investing and the Stock Market 2015-16 Trader - 2 New Trainee - 1 9 Student can identify two types of investments. 9 Student can identify one type of investment. 9 Student can describe the risk level and the purpose of at least one type of investment in an investment portfolio. 9 Student cannot describe its risk level or its purpose in an investment portfolio. Student can articulate 2 key differences between saving and investing. 9 9 Student can articulate the basic distinction between saving and investing. Student cannot articulate the difference between saving and investing. 9 Student can list at least 3 savings vehicles and 3 investment vehicles. 9 Student can list at least 2 savings vehicles and 2 investment vehicles. 9 9 Student can prescribe investment strategies that match specific investment goals. 9 Student can prescribe investment strategies that match specific investment goals. Student cannot prescribe investment strategies that match specific investment goals. 9 Student can identify 1-2 common investment mistakes, explain why the decisions are mistakes, and recommend alternative financial decisions. 9 Student can identify 1-2 common investment mistakes. 9 Student cannot identify any common investment mistakes. © Copyright Magnetar Youth Investment Academy 5 Managing Director - 4 9 Stock Analysis 9 9 Stock Analysis Portfolio Manager - 3 Trader - 2 Student can list five 9 or more things to look for when analyzing a company for a potential investment. 9 Student can analyze a stock and articulate 3 investment merits, 2 micro-level risks, and 2 macro-level risks related to that company’s stock. Student can list 3-4 things to look for when analyzing a company for a potential investment. 9 Student can list 1-2 things to look for when analyzing a company for a potential investment. Student can analyze a stock and articulate at least 2 investment merits, 1 microlevel risk, and 1 macro-level risk related to that company’s stock. 9 Student can analyze a stock and articulate at least 1 investment merit and 1 risk related to that company’s stock. Student can define 9 and explain 4 or more terms on a stock chart. Student can define 9 and explain 3 terms on a stock chart. U3: Investing and the Stock Market 2015-16 New Trainee - 1 9 Student cannot identify any things to look for when analyzing a company for a potential investment. 9 Student cannot evaluate a stock or articulate any investment merits or risks related to that company’s stock. Student can define 9 and explain at least 2 terms on a stock chart. Student cannot define and explain any terms on a stock chart. © Copyright Magnetar Youth Investment Academy 6 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 1: Investing Fundamentals Duration: 90 minutes Lesson Summary This lesson covers the fundamentals of investing. Students will compare and contrast different investment instruments, including stocks, bonds, and mutual funds. Students will discuss an actual investment success story and then advise fictional characters on common investment mistakes as they learn basic investment concepts. Lesson Objective(s) à Compare and contrast saving and investing. à Describe the relationship between risk and reward in investing. à Differentiate between stocks, bonds, funds, and cash investments. à Articulate common investment mistakes. Lesson Materials Handouts and Resources: 9 Risky Business Online Savings Calculator (Bankrate.com)i Video Clip: Magic Johnson – Game Changers ii Warm-Up Activity (10 minutes) 1. Show the Magic Johnson Game Changers video clip. The clip from 8:35 through 12:00 documents Magic’s initial business decisions and early lessons learned about how to manage his own finances. 2. After showing students the clip, inform students that Johnson went on to leave the game of basketball, and has since become a very successful businessman with investments in movie theaters, Starbucks, sports teams, and, most recently, he has opened up a school. 3. Facilitate a discussion with students: 9 What set Magic apart from other athletes who have not achieved this level of success “off the court?” 9 What did he learn from what happened to his friend, Kareem Abdul-Jabbar? 9 What were some of the key decisions he made that set him up for financial success? 4. Allow students to ask any questions they have, and let them know that regardless of the source of one’s “earned income,” it is important to also save and invest to build long-term financial stability and success. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 7 Learning Activity (80 minutes) INVESTMENT VEHICLES (20 MINUTES) 1. Inform students that Magic Johnson is one of many investment success stories. It is important, however, to also understand the stories of those who have not made the right investment decisions. Today’s lesson will highlight some common investment mistakes, but first, students will talk about a few of the most common “investment vehicles.” 2. Remind students that they learned about a number of ways to save in Unit One. (E.g. Savings and Money Market Accounts; Certificates of Deposit; US Savings Bonds; College Savings Plans). 3. Ask students - What are some examples of things you’ve heard of that you could invest in? (Write students’ responses on the board). Examples may include: 9 Stocks, bonds, mutual funds; index funds 9 Real estate; Commodities; Derivatives; Futures; Options; Annuities 9 Retirement Accounts – IRA; 401K; 403B; College Fund (529) 9 A friends’ business; An initial public offering (IPO) 4. Explain to students that there are many ways to invest money. Today’s class will delve into stocks, bonds, and mutual funds specifically. 5. Divide the class up into three groups – Bonds, Stocks, and Mutual Funds. Inform students that each of them will be assigned to one of these three investments, and their group will be charged with teaching the class about it. 6. Inform students they are to answer the following questions for the class: 9 Group A: What is a stock? Group B: What is a bond? Group C: What is a mutual fund? 9 Each group’s assignment is to provide a definition and some benefits of the investment they represent, as well as three to five key things the class should know to help them understand this investment and how it works. 7. Advise students that they should rely on prior knowledge only! As students work in their groups, walk around the room to answer questions that come up for them. 8. Allow each group to present, one by one, and supplement their presentations with the following information: U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 8 Bonds 9 All bonds are essentially a “loan.” When you purchase a bond, you are providing a “loan” to the issuer of that bond. 9 There are many different kinds of bonds. o US Savings Bonds are issued by the federal government. o A Corporate Bond is a bond issued by a company. o Municipal Bonds are issued by cities (such as Chicago) or other local governmental entities. o Corporate and Municipal Bonds are not insured by the FDIC. 9 When you buy a bond, you are loaning your money to that entity for a predetermined period of time (the due date is known as the maturity date). 9 The borrower must pay you an interest rate (the coupon) in exchange for the loan. 9 Just like people have FICO scores to determine their riskiness to lenders, corporations and cities also have credit ratings so potential investors can tell how risky it is to lend to them. 9 The lower the credit rating, the higher the issuer of the bond must pay you. 9 If the company goes bankrupt, there is a chance that bondholders might not get paid back. Stocks 9 Stockholders are actually owners of a company. Shareholders have the right to vote at shareholders’ meetings. 9 Risk & Return. Stock is the riskiest position you could have in a company. Accordingly, it also offers the potential for the highest return. 9 Unlike a bond, a stock is not a loan. The Company does not owe you a set amount of money back. But you do have a right to the future profits (bottom line) of the company (if there are any). 9 A share is a unit of ownership in a publicly-traded company, a claim on the company’s assets and FUTURE earnings. (Throughout the Unit, the terms “share” and “stock” will be used interchangeably). 9 Shareholders can make money two ways; o Some companies pay regular dividends to their shareholders. o You can sell the stock for more than you bought it (CAPITAL GAINS). 9 Because shareholders have a claim on the bottom line, this means that all other expenses get paid before shareholders (owners) get paid – including the Company’s Debt-holders (bondholders). 9 Accordingly, investors place a lot of scrutiny on Company Earnings Releases. Mutual Funds 9 Mutual Funds are a way to invest in a “collection’ of stocks and/or bonds. 9 You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. 9 Each investor owns shares of the fund, which represent a portion of the holdings of the fund. 9 Mutual Funds are what most average investors use as a way to invest in their retirement accounts. 9 Mutual Funds are a way to “diversify” in a lot of different stocks/bonds by purchasing shares of a fund. This cuts down on the risk related to any one of the stocks or bonds in the fund. 9 A mutual fund is created and managed by a professional investment company. They charge you a fee for the management of the fund. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 9 CHECK FOR UNDERSTANDING (5 minutes) 1. Remind students they have learned about three Asset Types (STOCKS, BONDS, and FUNDS). (Write these three on the board). Have students get into groups of three or four. Ask students to summarize what they learned about the similarities and difference between the three. 2. Reconvene the group and ask students the following questions: 9 What is the difference between a stock, a bond, and a mutual fund? 9 How do the three vary in terms of risk? 9 How do they vary in terms of return? Risky business case studies – You be the Advisor The remainder of the lesson will be structured around three key investment concepts: (1) Purposes of Saving and Investing; (2) Risk & Return; and (3) Time Horizon & Liquidity. SAVINGS VERSUS INVESTING (15 MINUTES) 1. Pass out the “Risky Business” handout, and have students get into small groups. Inform students that they will serve as Investment Advisors to people who made some investment mistakes. 2. Read through the following example of Carl out loud as a class. Name: Carl Age: 47 Financial goal Carl had $5,000 saved up for a $10,000 car he planned to buy in 12 months. He wanted to double his money quickly. Investment Made Got a stock tip from his uncle about a company he just heard about. Not wanting to miss out on a hot deal, he bought the stock right away. What went wrong? Three months after Carl bought the stock, the market tumbled. By the end of 12 months he lost half of his investment and didn’t have the money he needed for a car. 3. Allow time for the groups to discuss the following questions from the handout: 9 What was his/her investment goal? What was the timeline for his/her goal? 9 What went wrong? 9 What could each person have done differently to avoid the negative investment outcomes? 9 What advice would they give the person? 4. Start a discussion by calling on students/groups to share their feedback for Carl. In the debrief, share with students the following: Goal: Double his $5,000 investment to buy a car Timeline: 12 months Mistake: He made a high-risk, long-term investment to try to finance a short-term goal. Could have been avoided: If he kept his original $5,000 in savings he would have had it available 12 months later, plus interest. 5. Write the words SAVING and INVESTING on the board. Emphasize to students that there is a difference between SAVING and INVESTING. Both are important, but they serve two different purposes. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 10 Purpose of Saving v. Investing 1. Ask students to recall the purpose of SAVING. Make sure to emphasize the following points: 9 SECURITY: Savings is intended to preserve money so that it will be there when needed; it serves as protection against uncertainty and preparation for emergencies. It is a form of “insurance.” 9 Potential uses include: funding living expenses in case of job loss; funding a major expense in the near future. 2. Ask students to recall the purpose of INVESTING. Make sure to emphasize the following: 9 GROWTH: Investing money intends to generate profit & wealth, and to grow money over time (e.g. the purchase of a stock that increases in value over time; then selling it at a higher price) 9 INCOME: Investing can also be used to generate additional “current” income (e.g. the purchase of a stock that pays dividends) RISK & RETURN (25 MINUTES) 1. Inform students that another important difference between saving and investing is RISK. 2. Break students up into four teams. 3. Explain to students they are about to play another game of Upside/Downside. 4. Read the following list in order to the students and give them one minute after each item is read to list all the rewards that could potentially come from making that investment or purchase (The Upside). Then, give them another minute to come up with a list of all the things that could potentially go wrong if they make that investment (The Downside). 9 Buying a stock 9 Buying a building 9 Opening a savings account 9 Buying a savings bond 9 Purchasing a CD (Certificate of Deposit) 9 Loaning money to a friend 5. After the teams complete the process, walk through the list and allow students to share their responses. 6. Note that the savings products typically have minimal to no downside (RISK), but very also limited upside (RETURN) potential. Conversely, while the investments have higher upside potential, they also can have unlimited downside risk. 9 Write the words RISK and RETURN on the board. 9 Inform students that, in general, the greater the potential for an investment to increase substantially in value (RETURN), the greater the RISK it might also drop substantially. 7. Inform students of the following: 9 Savings and Investing differ in terms of potential RETURN (PROFIT). 9 Unlike the banking world, where the FDIC insures your deposits, in the world of stocks and bonds, there are no guarantees. You could lose all of your investment. 9 Accordingly, it’s important to make informed investment decisions and do your research. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 11 Investor Protections. 1. Inform students that there are, however, some protections for investors. Highlight the following points: 9 The investment world is regulated to protect investors from fraud and to help ensure that the markets operate efficiently. 2. Ask students if they have heard of the SEC. 9 The Securities and Exchange Commission in Washington, D. C. regulates the stock market and oversees all companies that sell stock to the public (called “public companies”). 9 The SEC enforces the laws the government passes to protect investors from fraud. 9 Strongly emphasize the point: Although the SEC plays an important role, it does not protect your investment from losing money. For example, if a company is prosecuted and punished for fraud, it does not necessarily mean its investors will get their money back. 9 In addition, publicly traded companies have a significant number of rules they must follow, including reporting requirements. 9 Public companies are required to provide to the public their full financial statements, annually, quarterly (four times a year), and every time there is a major event that may impact shareholders. 3. Close out the Risk & Return section with having students in their groups review and come up with advice for Rita (the next profile in their handout). Name: Rita Age: 28 Financial goal Investment Made What went wrong? Invest in her child’s college fund. Her child goes to college in 10 years. Purchased some stock in hopes of “growing” the money she will need 10 years. As the market began to decline, so did her stock. She watched the stock every day, and the value of the stock began to decline shortly after she purchased it. She could not take it, and she sold it 3 months after she bought it and took a loss. 6 months later, the company got a new CEO, and the stock has been increasing steadily ever since. Rita sold too soon! Long-term investments can be higher risk and change a lot from day to day. She made an emotional decision to sell in the short-term because the volatility of the stock made her nervous. 4. After the groups have had an opportunity to discuss, call on a few groups to share their advice for Rita. In the debrief, share with students the following: Goal: Invest in money for her child’s college fund Timeline: 10 years Mistake: She made a high-risk, long-term investment and sold the stock in the first year due to a volatile market. Rita made an emotional sell. Could have been avoided: She should have held on to the stock for the long-term because she didn’t need the money yet and the stock price grew over time. 5. Inform students that, in taking on a risky investment like stocks, one must be able to handle the fact that the value will likely fluctuate. Rita wanted the kind of upside (RETURN) a stock could provide, but she couldn’t take the risk. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 12 TIME HORIZON & LIQUIDITY (15 MINUTES) 1. Inform students that another key difference between saving and investing is the availability of funds. That is, how quickly you can get access to your cash when you need it. This is called LIQUIDITY. Write the word “LIQUIDITY” on the board. 2. Have students in their groups, read and advise on the final two profiles: Tim and Janet, and discuss the questions in the handout: Name: Tim Age: 33 Financial goal Generate Additional Income. Investment Made Took some money from his emergency savings fund and invested in real estate. What went wrong? Tim was laid off shortly after he made the investment, and no longer had access to his emergency fund because it was tied up in the real estate investment. In addition, the property required some repairs that he did not have the cash to make, and he was not sure how long he would be able to keep up his own living expenses. The housing market started to slow down and the value of the property he purchased was less then when he bought it. He had no liquid assets and the house could take many months to sell. Name: Janet Age: 31 Financial goal Save for a down payment on a home she was planning to buy next year. Investment Made Janet took money out of savings and bought some stock that had been in the newspapers for a while. What went wrong? The next year when her opportunity came to purchase the home, Janet found that the value of her shares had actually declined by 35%! If she were to sell her stock, she would not have enough for the down payment for the house wanted. 3. After the groups have had an opportunity to discuss, call on a few groups to share their advice. In the debrief, share with students the following: Tim Goal: Generate additional Income Timeline: Today Mistake: He used emergency savings to make a high risk, long-term investment. He invested without first securing his emergency fund. Could have been avoided: He should have left his emergency fund in savings so it would be available when he lost his job unexpectedly. Goal: Save for a down payment on a home Timeline: 1 year Mistake: She made a high-risk, long-term investment to try to finance a short-term goal. Could have been avoided: If she kept the original money in savings she would have had it available 1 year later, plus interest. Janet U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 13 4. Write the words “LIQUID ASSET” on the board. Inform students that: 9 Some savings products are actually referred to as “cash investments” or “cash equivalents” because they are nearly as easy as cash to access when needed. 9 Savings should always be kept in liquid accounts and investments. 5. Ask students to brainstorm examples of liquid and illiquid assets. 9 LIQUID ASSETS include cash, US Savings bonds, and short-term CD’s. 9 Real Estate is an example of an investment asset that is NOT LIQUID. 6. Inform students that, related to liquidity, another key difference to consider is TIME HORIZON. Note that: 9 Savings is used to fund short- or near-term needs. (E.g. If you need the money in the next few years). 9 Because of the risk involved, investing is best done with funds you will not need in the near future (best for longer-term needs). Parking Lot (5 minutes) Students may have submitted financial questions to you via text or email. Take this time to discuss one or two of the questions submitted. Encourage group discussion. Closing Bell (Optional) Using the Closing Bell list provided by Magnetar Academy, you can either use this time to teach one of the 5-minute Mini-Lessons on the stock-related concept, OR look up the "stock of the day" on Yahoo or Google Finance with the class and project the page (if possible). Discuss recent news, performance, and other matters (e.g. industry announcements) related to stock’s performance. Alternatively, use the Wall Street Journal newspaper and read from it to the class. http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx ii http://www.bloomberg.com/news/videos/2015-01-26/magic-johnson-basketball-business i U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 14 U3LP1 Handouts Risky Business Investing can be risky business. Sometimes big risks can mean big payoffs. But sometimes they mean big losses. Here are a few examples of people who took big risks and lost a lot of money. Read through the following examples, and for each person, answer the following questions: • What was his/her investment goal? What was the timeline for his/her goal? • What went wrong? • What could they have done differently to avoid the negative investment outcome? • What advice would they give the person? Name: Carl Age: 47 Financial goal Carl had $5,000 saved up for a $10,000 car he planned to buy in 12 months. He wanted to double his money quickly. Investment Made Got a stock tip from his uncle about a company he just heard about. Not wanting to miss out on a hot deal, he ran the stock right away. What went wrong? Three months after Carl bought the stock, the market tumbled. By the end of twelve months he lost half of his investment and didn’t have the money he needed for a car. Name: Rita Age: 28 Financial goal Investment Made What went wrong? Invest in her child’s college fund. Her child goes to college in 10 years. Bought stock in hope of “growing” the money she will need in 10 years. As the market began to decline, so did her stock. She watched the stock every day, and the value of the stock began to decline shortly after she purchased it. She could not take it, and she sold it 3 months after she bought it and took a loss. 6 months later, the company got a new CEO, and the stock has been increasing steadily ever since. Rita sold too soon! Long-term investments can be higher risk and change a lot from day to day. She made an emotional decision to sell in the short-term because the volatility of the stock made her nervous. Name: Tim Age: 33 Financial goal Generate Additional Income. Investment Made Took some money from his emergency savings fund and invested in real estate. What went wrong? Tim was laid off shortly after he made the investment, and no longer had access to his emergency fund because it was tied up in the real estate investment. In addition, the property required some repairs that he did not have the cash to make, and he was not sure how long he would be able to keep up his own living expenses. The housing market started to slow down and the value of the property he purchased was less then when he bought it. He had no liquid assets and the house could take many months to sell. Name: Janet Age: 31 Financial goal Save for a down payment on a home she was planning to buy next year. Investment Made Janet took money out of savings and bought some stock that had been in the newspapers for a while. What went wrong? The next year when her opportunity came to purchase the home, Janet found that the value of her shares had actually declined by 35%! If she were to sell her stock, she would not have enough for the down payment for the house wanted. U3LP1: Investing Fundamentals 2015-16 © Copyright Magnetar Youth Investment Academy 15 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 2: Investment Goals Duration: 90 minutes Lesson Summary Students will learn how investing can support short, medium, and long-term financial goals. Students will explore the use of different investment instruments and strategies to align with differing objectives and time horizons. Lesson Objective(s) à Differentiate between conservative, moderate, and aggressive risk profiles. à Differentiate between asset preservation; Income, and growth investment strategies. à Differentiate between short- and long-term investment horizons and corresponding strategies. à Match saving and investment vehicles to financial goals and risk profiles. Lesson Materials Handouts and Resources: 9 Investor Time Horizon 9 Portfolio Profiles 9 Investment Match Up 9 Personal Assets Savings Calculator iii Bankrate.com Warm-Up Activity (5 minutes) 1. Ask students the following questions: 9 “What is an investment goal? What might be some examples?” 2. Take responses from the class. Guide students to compare the kinds of investment and financial goals people may have: (e.g. short-term/long-term, etc.) Learning Activity (85 minutes) PLANNING FOR RETIREMENT (20 MINUTES) 1. Inform students that they will now consider a case of three people – each in their 20’s and 30’s who have the goal of saving for retirement (they each plan to retire in their 60’s). Each of them are fantastic at budgeting and saving, but their retirement savings strategies are very different. 2. Ask for three student volunteers to come to the front of the class to play the roles of the following characters: 9 Michael is saving money for his retirement under the mattress. (write on the board: “MATTRESS”) 9 Kenya is socking away any extra money she saves in a savings account, because she wants to make sure her money stays safe. (write on the board: “SAVINGS ACCOUNT”) U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 16 9 Jerrod has his money in a combination of cash, a savings account, and investments. (write on the board: “CASH + SAVINGS + INVESTMENTS”) 3. In their groups, have students provide the pros and cons to each of these three strategies. (The three student volunteers can form their own group and discuss). 4. Allow students to provide critique and advice to Michael, Kenya, and Jerrod respectively as it relates to the retirement strategies they currently have in place. Allow the three students to return to their seats. 5. Explain to students that, in critiquing these three retirement savings strategies, it’s important to take into account two key factors: INFLATION and COMPOUNDING. Inflation 1. Write the word “INFLATION” on the board. 9 Ask students if they have heard the word inflation, and what they think it means. Take responses from the class. Highlight the following points: - The word INFLATION relates to the tendency of prices to “inflate” (rise) over time. - For example, if you purchased something that cost $20 in 1990, that same item would cost $37 in 2012, due to inflation alone. - Recall with students that they may have heard their grandmother compare what it used to cost for a pack of gum when she was a child to what it costs today. - Typically, the interest rate you receive from a Savings account is lower than the rate of inflation (~3%). That means, if you ONLY saved and did not also invest, your money would be there when you need it, but over time it would decrease in value due to inflation. - Successful investing allows you to not only keep up with inflation, but to also see your money grow. This is why it is important to both Save and Invest. 2. Inform students that, in considering Michael, Kenya, and Jerrod, NEITHER Michael NOR Kenya would be able to keep up with inflation with their savings-only strategies. They would actually be LOSING the value of their money over time. Compounding 1. Revisit the concept of compounding introduced in Unit 2. Ask students to recall what COMPOUNDING means. 9 When you receive compound interest, the bank pays you interest on the interest you’ve earned. 2. Inform students that compound growth also applies to investment returns. 9 In addition to “reinvesting” the interest earned from a savings account, you can reinvest investment income earned from stocks and bonds. 9 Because the returns from successful investing (~7-10% over time) are significantly higher than the returns from Savings, the impact of compounding is much greater for one’s investments. 3. Show examples to illustrate the power of compounding when saving versus Investing. 4. Project http://www.bankrate.com for the class. Use the compounding calculator to show the growth potential with a 1% return (savings account) and an investment that earns 8% on average if they invest between the ages of 17-67. 5. Inform students that Jarrod’s strategy would allow him to take advantage of the growth that compounding offers as he builds for retirement. 6. Emphasize the impact of compounding on savings and investing with the following advice: U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 17 9 When it comes to investing, time is your greatest advantage as young people. 9 It is never too early. As soon as you begin generating income, you can start saving and investing. 9 The importance and power of regular, monthly investing to fully take advantage of compounding returns cannot be underestimated. 7. Point out that it is important to match one’s financial goals to an appropriate saving or investment vehicle. FACTORS THAT INFLUENCE SAVINGS & INVESTMENT STRATEGY (20 MINUTES) 1. Review the different saving and investment vehicles explored thus far - STOCKS, BONDS, and CASH INVESTMENTS (Risk-Free savings products) – and how they differ in risk, return, liquidity, etc. 2. Ask students to identify the kinds of investment goals that might align with each. 9 Stocks – growing money over time to meet long-term financial goals (e.g., retirement); dividend income. 9 Bonds – debt investments primarily for fixed income. 9 Cash Investments – protecting cash for short-term financial goals. 3. Ask students to assume the role of an Investment Advisor. In meeting a new customer in need of advice, ask students to brainstorm what personal questions they may ask to help inform the development of their client’s savings and investment goals. Consider using an example to illustrate (e.g. a recent college graduate wants to invest money for retirement). 9 Age – How old is the person making the investment? 9 Time horizon – When is the money needed? Less than 3 years? Longer term? Over 10 years? 9 Risk tolerance – How comfortable is the person with risk/market volatility? 9 Dollar amount needed – How much money does s/he have to make the initial investment? 9 Ability to make regular contributions – How much will be invested on a regular basis after the initial investment? 9 Specific goals –What goals do you plan to fund in the near-term? (e.g. a house, college, graduate school, a car, a vacation) In the long-term? (E.g. retirement; starting a business?) 4. Pass out the “Investor Time Horizon” handout. Walk through the handout with students. Review characteristics of the various Savings & Investment Vehicles. Guide the discussion toward the key take-aways below, noting the respective time horizons. 9 INVEST SHORT-TERM (within the next 1-2 years) - Low risk savings vehicles for safety and liquidity. 9 INVEST LONG-TERM (5+ years) - Higher risk investment vehicles for growth. - INVEST MEDIUM-TERM (2-5 years) - Combine higher risk investment vehicles for growth with some lower risk vehicles for safety. 5. Transition the discussion to personal risk tolerance. Ask students to consider their own comfort level with regard to investing money. Ask students: If you earned $500 working for a month on a summer job, would you be more inclined to: 9 Save it? The risk of losing the money in investing is not worth it to you. 9 Invest it? The opportunity to make more money is worth the risk to you. U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 18 6. Introduce the idea of Risk Profiles. Explain the terms, CONSERVATIVE, AGGRESSIVE, and MODERATE to students. Write these words on the board. 7. Use the analogy of a rollercoaster to illustrate that some investment markets (e.g., stock, real estate) can be volatile. For some, the risk is worth the return. For others, the potential for loss is too unpalatable. This kind of risk tolerance translates into Risk Profiles: Conservative Investor Priority: Capital preservation (safeguarding) assets they already have. Outlook: “I want to avoid risk.” Aggressive Investor Priority: Investing for significant growth, even if it means putting some principal at risk. Outlook: “It’s worth the risk.” Moderate Investor Priority: Middle ground between protecting assets they already have and building longterm growth. Outlook: “I want to offset my risks with some predictable/stable investments.” PORTFOLIO PROFILES (15 MINUTES) 1. Hand out the Portfolio Profiles (Oscar and Joy). Ask students to form groups of three and review the profiles to determine each investor’s profile. Are these conservative, moderate, or aggressive investors? Extension Activity: You may also turn this activity into a role-playing exercise by breaking students into pairs and instructing them to take on the role of investor and advisor. 1. Reconvene the class and ask students to share their assessment of each investor’s profile (Conservative, Aggressive, Moderate) and explain their rationale. 2. Conclude by asking students to recall/summarize the trade-offs of each investor profile/strategy. Conservative Upside: No risk or low risk of losing money they already have. Downside: Vulnerable to inflation Aggressive Upside: Potential to earn higher returns. Downside: Potential to lose money (if investments are not diversified). Moderate Upside: Modest returns while protecting assets. Downside: Not likely to see huge returns. INVESTMENT MATCH UP (20 MINUTES) 1. Pass out the “Investment Match Up” handout and have students remain in their groups. 2. Explain that the handout profiles pairs of investors; each pair has similar financial goals. However, their personal investment profiles (e.g., age, time horizon) are very different. They need your advice on an appropriate saving or investment vehicle to meet their needs. 3. Give the groups 10 minutes to complete the handout and recommend an appropriate saving or investment vehicle to meet each investor’s needs. 4. Reconvene the class and ask students to take turns “introducing” their investors (by reading aloud from the handout) and then sharing recommended saving or investment vehicle for each investor. Then guide students to compare and contrast the investor profiles and how that influenced their recommendations. U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 19 ROBERTO & SANDRA PAMELA & SAMUEL Shared Goal: Invest in child’s college fund Shared Goal: Invest for retirement Contrast the recommended investments: Contrast the recommended investments: 9 Pamela has a 25 year time horizon. Samuel has 5 years. 2. Roberto needs the money in 2 years. Sandra has 17.5 years until her child goes to college. 9 Recommendations for Pamela: Stocks 9 Recommendations for Samuel: Bonds and Cash Investments 3. Recommendations for Roberto: Bonds with Cash 4. Recommendations for Sandra: Stocks 5. Conclude the activity by underscoring the fact that even though investors have the same financial goals, their profiles may differ significantly, and this ultimately affects how they should meet their financial goals. 6. Have students refer back to their Setting Goals from Unit One. Have students select one of their future goals and develop a savings/investment strategy to support that goal. Get in groups of 2-3 and share with one another their plans. Allow a few students to share with the larger group. GETTING OFF ON THE RIGHT FOOT (10 MINUTES) 1. Transition the discussion to students’ own financial future. Acknowledge that even though they are still in school and have little/no income, they can take proactive steps to make sure they start their financial investments off on the right foot. 2. Tell students to consider their current assets. They may not have a lot of cash saved up, but there are many important assets they do have. Write the following examples on the board and model the process by sharing some of your personal assets: 9 Time 9 Talents and skills they are developing that will help them earn future income (e.g. organizational skills, a trade, ability to solve problems, ability to fix things, etc.) 9 Knowledge about investing (and understanding the importance of starting young!) 9 Potentially some money (e.g. part-time job, gifts) 3. Emphasize the importance of investing in themselves, (e.g. getting an education; developing their skills; etc.). Ask students how their personal assets can help them reach their financial goals. 4. Pass out the “Personal Assets” handout. Ask students to record their assets on this sheet. 5. Ask students to form groups of three and share the assets they came up with. 6. Explain to them that sometimes others see assets in us that we may that we may not recognize. Instruct students to ask their group members for feedback regarding any assets they may have missed. 7. Ask students to pull out their “My Financial Plan Checklist” handout. They should place this in their plan. Savings Challenge 1. In addition to these assets they have the opportunity to start good savings habits now. Pose this challenge to students: 9 Save $10/month. Start now. 2. When they get more income as they get older, they should increase the contributions. What students will find is that they won’t even miss the money if they put it aside immediately and pretend like they never had it. Simple and painless…. And powerful. U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 20 9 Share an example: Ron is 17. He starts saving $10/month, and for the next 5 years, puts it in a bank account at 1% interest, he will have $625 when he graduates from college. 9 He gets a job after college and reinvests that initial amount in a moderate investment vehicle that averages 7%. 9 At age 22 he increases his contribution from $10/month to $100/month. When he retires at age 65 he will have $365,442.42. 3. Ask students: What else can you do now to make sure you start off on the right foot? 9 Open a checking/savings account. 9 Make a budget and stick to it. Don’t spend more than your budget allows. 9 Avoid debt. Leverage scholarships and more affordable college options. If you get a credit card in college, pay it off every month and build good credit. 9 Develop savings goals. 9 Start the life-long habit. Begin saving. Wrap-up Wrap up the lesson with a key take-away: building good financial habits like budgeting, building good credit, and limiting debt over the next five years means students will have more to invest as soon as they are able. The sooner they start, the further they can go! Parking Lot (5 minutes) Students may have submitted financial questions to you via text or email. Take this time to discuss one or two of the questions submitted. Encourage group discussion. iii http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 21 U3LP2 Handouts Investor Time Horizon Time horizon is important factor when planning investment strategies. Some investment vehicles are more appropriate for different investment time horizons. Time Horizon Vehicle Options More Aggressive < > More Conservative Short-Term: 1-2 years “CASH” INVESTMENTS & FDIC-INSURED PRODUCTS Rule of Thumb: Good for safety and liquidity, not growth. 9 Savings Accounts 9 Certificates of Deposit Investment Goal: Capital Preservation 9 Money Market Accounts Medium-Term: 3-5 years Rule of Thumb: Good middle ground between short-term and long-term with a mix of asset protection and growth to both build and offset inflation. Long-Term: 5+ years Rule of Thumb: The longer your time horizon, the more risk you can take because you have time to ride out short-term losses. Benefits & Trade-offs 9 (+) Money is safe and easy to access. 9 (+) If you plan to use the money soon, inflation won’t be a factor. 9 (-) Low rates of return 9 (-) May not outpace inflation in the long run 9 Mix of high-quality fixedincome investments (e.g. a high-yielding CD) 9 Requires closer monitoring stock investments to avoid losses. 9 Modest growth investments – e.g. a diversified largecompany stock fund. 9 9 High-quality & incomegenerating bonds As your time draws nearer, shift to conservative shortterm options (sell stocks and reinvest into more stable, income producing investments). 9 Growth investments – like stocks, stock funds. 9 (+) Greatest potential upside 9 (-) Greater risk 9 (-) Highest volatility 9 Higher-yielding bonds Investment Goal: Capital Growth (Appreciation) U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 22 THE SECRET TO INVESTING - START YOUNG!! As Social Security and pensions become more uncertain, it is all the more important to build your own retirement security. The earlier you start, the more you can build. TIPS 9 Make contributions to your retirement savings account early in your career. 9 Start with a certain amount per year. You can become a millionaire by retirement with $70/month. 9 It is essential that you begin investing young. If you don’t, you’ll be losing money and miss out on the power of compounding returns. Time is the most important thing you have in your favor. 9 Each year you have money and are not investing, you’re losing out to inflation. Another way to think about it: if you are not investing, the value of your money is actually going DOWN each year! 9 Remember to ensure your Emergency Fund is in place! U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 23 Portfolio Profiles Joy – Age 28 Current Investments Percentage of Overall Investment Cash Investments & Savings Vehicles 10% Bonds 10% Stocks 80% Is Joy’s portfolio: Conservative? Moderate? Aggressive? (Select one) What might be some of her investment goals? Oscar – Age 57 Current Investments Percentage of Overall Investment Cash Investments & Savings Vehicles 40% Bonds 45% Stocks 15% Is Oscar’s portfolio: Conservative? Moderate? Aggressive? (Select one) What might be some of his investment goals? U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 24 Investment Match Up Recommend a savings and investment vehicle that is appropriate for each person’s financial goals given their profiles. Name PAMELA – Age 25 SAMUEL – Age 58 Financial goal Invest for retirement Invest for retirement Time Horizon 25 years 5 years Risk Tolerance Aggressive Conservative / Low Risk Priority Growth Income; Capital Preservation Name ROBERTO – Age 52 Has a 16 year old child. SANDRA – Age 24 Has a 6-month old child. Financial goal Save for child’s college fund Save for child’s college fund Time Horizon 2 years 17.5 years Risk Tolerance Moderate Aggressive Priority Preservation Growth Recommend a savings or investment vehicle Recommend a savings or investment vehicle U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 25 Personal Assets List your personal assets below. Once you have finished, pass your paper to a member of your group to add any additional assets they think you have. 1. ____________________________________________________________________________ 2. ____________________________________________________________________________ 3. ____________________________________________________________________________ 4. ____________________________________________________________________________ 5. ____________________________________________________________________________ 6. ____________________________________________________________________________ 7. ____________________________________________________________________________ 8. ____________________________________________________________________________ U3LP2: Investment Goals 2015-16 © Copyright Magnetar Youth Investment Academy 26 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 3: The Stock Market Duration: 90 minutes Lesson Summary This lesson covers the fundamentals of the stock market. Students will engage in a whole-class market simulation to learn how investment markets function and factors that drive prices. In this lesson, students will also learn about different kinds of stocks in which they can invest. Lesson Objective(s) à Explain how investment markets function. à Explain how the stock market works and what drives prices. à Differentiate between the stock exchanges and indices. à Differentiate between different kinds of stocks. Lesson Materials Handouts and Resources: 9 “When Bubbles Burst “ Warm-Up Activity (10 minutes) 1. Ask students the following questions: 9 What do you know about the stock market? 9 How does the stock market work? 9 What do you want to understand about the stock market? 2. Take responses from the class. Learning Activity (80 minutes) SUPPLY & DEMAND IN ACTION – A MARKET SIMULATION (20 MINUTES) 1. Explain to students that markets are where things are purchased and sold, and where prices get established. Inform them that the class is going to form a market. Divide the class into three groups (or the class can participate as one group): 9 Group I will be The Company; Group II will be The Customers; Group III will be The Investors 2. Explain to students that how much a product is worth is determined by what people are willing to pay for it. 3. Draw a picture of a jacket on the board. Tell students that Group I is starting a sports apparel company. Guide the class through the following scenario: U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 27 SET THE PRICE 9 Ask Group I (the Company) how much they will charge for the jackets and where they will sell them (e.g. online or select a specific retailer) Allow them time to discuss if needed. 9 Ask Group II (the Customers) - How much they would be willing to pay for Group I’s jackets? (Their answers do not have to be the same). ATTRACT INVESTORS 9 Inform the class that the company requires start-up capital. The Company has pulled together a group of private investors and is offering this exclusive group an opportunity to get in on the ground floor before other investors find out about it. 9 Ask Group III (the Investors) how many of them would be willing to invest and become shareholders in the new company (by a show of hands). COMPANY NEWS 9 Ask Group I - (the Company) if they want to change the price. 9 Ask Group II – (the Customers) how many of them would be willing to purchase the jackets, and for what price, if it has changed at all. 9 Allow Group III – (the Investors) to reconsider. How many of them would like to invest in the new company, given this new information? Are there any new investors? CHANGE IN PERCEIVED VALUE? 9 Ask students - Did the value of the jacket change? If so why? 9 Ask Customers and Investors to explain any changes in their interest or perceived value. Ask the Company how it arrived at its new price. OVERWHELMING DEMAND 9 Inform the class that the word is out, and everyone wants the jackets! There are more orders than the Company can handle. New investors are actually contacting the company to see if they would like to meet. 9 Allow the Company to reconsider their price. How much do they want to charge per jacket now? COMPANY NEWS 9 Inform students that a news story has just been released that the deal is likely falling apart. It is rumored that artists and athletes are backing out of the endorsement agreements with the Company. Another apparel company has been courting some of them and stealing them away! Ask the class how, if at all, they think this might affect the stock price of the Company. 9 Customer Complaints – Suddenly customers are complaining. Some want their money back. Sales have dropped dramatically and the Company has more jackets than it can sell. Some customers have begun a negative Internet campaign about the jackets. 9 Investors are concerned shares have declined. Why? What can the investor do about it? 9 Ask the Company if it wants to reconsider its price again. What will it do with all of its inventory? U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 28 4. Take a moment to debrief the concepts illustrated in the mini simulation. Emphasize the concepts of SUPPLY AND DEMAND and their relationship to price activity and market interest. 5. Allow students to share any observations they have about the simulation that just took place. Have each group talk about the decisions that they made and the choices facing the company throughout the simulation. 9 Write on the Board: “VALUE IS DETERMINED BY THE MARKET.” - Ask students what they think this statement means. - Ask students what factors impacted the price of the product as well as the Investor interest in the company. 9 Emphasize the following points: - Markets are made up of buyers and sellers. Today we had two markets – the customer market for the product (jackets) and the investor market for a company. Customers want to know if the product is valuable. Investors want to know if the company is valuable. - There is a relationship between demand and pricing. When lots of people wanted to buy the jackets, there was a high demand. As demand increases, you can charge more. - When there was more supply than demand, the price drops. (If no one wants it, it’s not worth anything in the market) - In sum, prices are determined by SUPPLY AND DEMAND. Demand (and accordingly, pricing) is driven by Investors’ and customers’ sentiments, attitudes, expectations, and sometimes rumors and fears about whether the product has value (for customers) or if the company will be profitable (for Investors). 9 Different kinds of markets : - There are other markets as well – real estate market, bond market, tech market, and stock market. The dynamics that drive prices are similar across these various investment markets, though the stock market is the most volatile. THE STOCK MARKET (15 MINUTES) 1. Transition the discussion to the STOCK MARKET. Ask students to recall the definition of a stock. (A stock is a unit of ownership in a publicly-traded company). 2. Ask students what they think a STOCK MARKET is. (The stock market is a broad term to describe where stocks are bought and sold). 3. Review the following with students: 9 When a company issues stock, the buyer gets a “share” of ownership in the company. In exchange, the company gets money it needs to grow. 9 Investors “own” a share of a company’s future Earnings (also referred to as Profit, the Bottom Line, or Net Income). 9 If a company is profitable, its shareholders benefit. 9 If a company is not profitable, its shareholders lose. 4. Briefly discuss the difference between a PUBLIC vs. PRIVATE COMPANY. Inform students: 9 Not every company has stock available to purchase in the stock market. (E.g. you cannot purchase stock in the corner bodega; the stock in our apparel company was not available in the public markets.) U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 29 9 When a company is part of a stock exchange it is a PUBLIC COMPANY. That is, shares in the company are bought, sold, and owned by members of the public (i.e., investors). 9 A PRIVATE COMPANY does not participate in a stock exchange. Members of the general public cannot purchase stock in private companies. 9 There are significant requirements for becoming and remaining a public company. You may have heard the term “IPO”. This stands for INITIAL PUBLIC OFFERING and refers to the process of “going public”. 9 A company goes public because its management believes the company can raise more money by allowing the general public to become investors. The company believes that there is a “public market” of investors that it wants access to. 5. Continue with an explanation of EXCHANGES. Emphasize the following points: 9 Exchanges constitute the actual “markets” where companies’ shares are bought and sold. 9 There are many exchanges, and each has its own listing requirements and fees for companies whose stock is traded on them. Companies can list their stock on more than one exchange if they choose (much like we could have chosen to sell our jackets through more than one retailer.) 9 The majority of publicly traded companies are listed on the New York Stock Exchange (NYSE) or the NASDAQ. 9 The New York Stock Exchange is located in New York City, and the companies traded here are typically more established, stable, mature companies. This is the largest stock market where people buy and sell stock in person, by trading on the floor of the exchange. 9 The NASDAQ exchange is typically made up of younger companies with prospects for higher growth (many internet and tech companies). It is the largest electronic stock market; stocks are traded over the computer. 6. Explain to students that companies that trade on stock exchanges are identified by their stock symbol (or ticker symbol). Think of these as “nicknames” for the company. Write some of the following examples on the board. 9 SBUX - Starbucks 9 HOG – Harley Davidson 9 GOOG – Google 9 AAPL – Apple Inc. 9 MSFT - Microsoft 7. Ask the class to name the apparel company (from the mini market simulation earlier in the lesson) and then come up with a stock symbol for it. TYPES OF STOCKS “TABOO” (10 MINUTES) 1. Break students out into three teams 2. Give each group a piece of paper with one of the following terms on it: Growth, Income, and Large-Cap/Mid-Cap/Small-Cap (You can choose one of these three). Advise them not to let the other teams know what their word is. 3. Explain to the students that they are about to play a game of “Taboo”. Each team needs to give the other team clues as to what their word is without using the ACTUAL WORD. They may also use gestures. 4. Once one of the other teams has correctly guessed the word; move on to the next team. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 30 5. When all teams have finished and the words have been correctly guessed, explain that the stock market is made up of thousands of public companies. There are a few types of stocks to consider when investing. Explain the following: 9 Growth – These are fast growing companies. They usually do not pay a dividend because the Company is focused on reinvesting all its money into growing the business. Many technology stocks are growth stocks. The market expects the earnings of these stocks to grow faster than the overall market. 9 Income – These stocks pay back dividends to shareholders on a regular basis. They are companies that are not as focused on rapid growth, so they can pay out profits with investors. These stocks tend to be less volatile than growth stocks. Common industries known for having income stocks include: energy, utilities, real estate, and financial services. 9 Large Cap / Mid-Cap / Small-Cap – These categories relate to the size of the company. “Cap” stands for MARKET CAPITALIZATION, which is another way of saying how much it’s worth. Large-Cap companies are worth more than Mid-Cap which are worth more than Small-Cap. - Large Cap companies include some of the world’s largest companies - Wal-Mart, Microsoft, and GE – companies worth $10B or more. - Mid-Caps range from $2B-$10B. - Small Cap companies range in market cap from $300MM-$2B. INDICES – THE DOW AND THE S&P 500 (5 MINUTES) 1. There are many INDICES that have been created to cluster stocks together that have common characteristics. Two of the most popular Indices are the S&P 500 and the Dow Jones Industrial. 2. Write the words “STOCK INDEX” on the board. 3. Explain that a group of stocks that have something in common is called an “Index”. There are many Indices – representing different industries (for example, a real estate Index may be comprised of a sub-set group (or a representative “sampling”) of stocks from the Real Estate industry. If you wanted to know how real estate stocks were doing, instead of manually looking into every real estate stock traded on the market, you could look at the Index as representative of how the larger sector is doing. 4. There are two indices that are commonly referenced: 9 DOW Jones Industrial (sometimes referred to as “the Dow”) – This is a group of 30 widely held stocks that are listed on the NYSE. They are mostly industrial companies. The index is computed using a price weighted index system (add up all the prices then divide by the number of stocks in the index). 9 S&P 500 – This is a group of 500 stocks that are widely held and traded on the NYSE or the NASDAQ. It is mostly made up of US-based companies. The S&P 500 is commonly quoted as an indicator of the economy and the market as a whole. 5. Check for understanding by asking students to differentiate between an exchange and an index, and to identify and describe examples of each. 6. Ask students it they recall what a MUTUAL FUND is and take responses. Inform students that investors can also invest in an INDEX FUND. An Index Fund is a type of Mutual Fund that only invests in stocks within a certain index. For example, investors can buy shares in an S&P Index Fund – that performs about the same as the overall market. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 31 WHAT DRIVES STOCK PRICES? (30 MINUTES) 1. Ask students to recall the earlier mini market simulation. Ask students to predict what factors drive stock prices. Explain that: 9 Supply and Demand for the company’s stock among investors determine trading prices. Demand is driven by many factors including: 9 Expected Earnings – Investors pay close attention to a company’s earnings in part because shareholders get paid from bottom-line earnings (Net Income). 9 Market Expectations – Value is driven by what the market expects will happen and what the market thinks the company is worth (and long-term earnings potential). Sometimes it is not as much about earnings, but more about overall potential to create value in the future (particularly for newer companies or industries). 9 Attitudes and Emotions – In addition to a company’s performance, fear, speculation, rumors, and emotions can also drive the markets. Volatility 1. Inform students that stock prices can increase or decrease at any time based on decisions of individuals, companies, and national or global events. 2. Pass out the “When Bubbles Burst” handout. Divide the class into two groups. Assign one group to the dot-com bubble and the other group to the housing bubble. Ask each to take 10 minutes to read their respective example of inflated market expectations and answer the following questions. Allow students to discuss amongst themselves. 9 What role did attitude and emotion play in the creation of the market bubble? 9 Describe an example of inflated market expectations before the bubble burst. How did that change after the bubble burst? 9 Do you think a similar bubble could occur again in this market? Why or why not? 3. Reconvene the class and ask each group to take turns sharing their analysis of the market expectations for the dot-com and housing market bubbles. Then guide the students to compare and contrast the two bubbles. Wrap-up Have students’ pair-share two new things they learned today about the stock market and one remaining question they have. Afterward, allow students to share with the class. Parking Lot (5 minutes) Students may have submitted financial questions to you via text or email. Take this time to discuss one or two of the questions submitted. Encourage group discussion. Closing Bell (Optional) Using the Closing Bell list provided by Magnetar Academy, you can either use this time to teach one of the 5-minute Mini-Lessons on the stock-related concept, OR look up the "stock of the day" on Yahoo or Google Finance with the class and project the page (if possible). Discuss recent news, performance, and other matters (e.g. industry announcements) related to stock’s performance. Alternatively, use the Wall Street Journal newspaper and read from it to the class. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 32 U3LP3 Handouts When Bubbles Burst Economic bubbles occur when assets are traded with inflated values and then fall dramatically. Typically this occurs when so many people decide to invest that the prices skyrocket past the point of the true value of the assets they are purchasing. When the market peaks, the bubble bursts and suddenly the prices fall dramatically. Below are two examples of economic bubbles. The Dot-Com Bubble (1995-2000) In the mid-to-late 1990s, Internet stocks soared during the “dot-com boom”. The Internet was still a relatively new phenomenon. Entrepreneurs created tech start-up companies for every kind of business imaginable, and investors were readily available. The Internet was changing the world, and everyone wanted to “get in early” on this new sector. Many of these companies were not making any profits and were not sure how they would make profits in the future. Yet, there was a significant amount of investment being poured into these businesses. The market was confident that profitable business models for Internet companies would have to materialize at some point. Tech companies went public at astonishing rates and stock prices climbed ever higher. Individual investors couldn’t wait to get in on the deal. The NASDAQ peaked at 5132.52 in March 2000, and the bubble collapsed throughout 2000 and 2001. Stock prices fell dramatically, and many tech start-ups went out of business. Investors who bought stock in tech companies at the height of the market lost significant amounts of money. The Real Estate Bubble (2005-2007) During the early 2000s, the US housing market was red hot. Housing prices grew at very high rates. Loans were easy to obtain, so new investors and new homeowners jumped into the market. Many people bought houses and then sold them immediately for huge profits (called “flipping”). Many people purchased homes that were more expensive than they could afford. Mortgages (home loans) often offered interest rates that were very low initially and increased significantly over time. That meant the payments homeowners made became more and more expensive, to the point where people could no longer afford to make payments. As a result, many people lost their homes to foreclosure. Housing prices dropped so significantly and so quickly that people’s homes were worth less than they originally paid for them. The downturn affected home valuations as well as the nation’s mortgage markets, banks, and large institutional investors. When the bubble burst in 2008, it nearly caused a collapse of Wall Street. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 33 What do you think? What role did attitude and emotion play in the creation of the market bubble? Provide an example of inflated market expectations before the bubble burst; how did that change after the bubble burst? Do you think a similar bubble could occur again in this market? Why or why not? U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 34 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 4: Context and Connections Duration: 90 minutes Lesson Summary Students will discuss how industry context and other macro factors impact their stocks. Students will learn to interpret stock fluctuations and evaluate economic and business factors after selecting a stock. Lesson Objective(s) à Analyze how economic and business factors affect the market value of a stock. Lesson Materials Google Finance Handouts and Resources: 9 Sectors, Industries, & Companies 9 My Company in Context i Yahoo Financeii Warm-Up Activity (5 minutes) 1. Ask students the following: How does what’s going on in the news (or in the world) affect the companies and respective stock prices in your portfolios? 2. Remind students that it’s not only important to do research to inform their investment decisions, but it’s also important to continue to follow the news after they have invested. 3. Inform students that staying in touch with the news of the day can make one a more informed consumer, investor, and individual. Informed stock investors watch the news. Learning Activity (80 minutes) MARKET CONTEXT AND CONNECTIONS (15 MINUTES) 1. Ask students to recall what factors impact stock price: 2. Supply and demand drive stock price. 9 Many factors influence how the market values a stock, and there are a myriad of factors that can cause the stock market to move significantly. 9 Economic data, political events, market sentiments, news events, earnings announcements, the company’s fundamentals, and anything that the market believes may impact the company’s future earnings. 3. Inform students they can think about how events impact their companies and stocks on three levels: at the Company Level, at the Industry Level, and at the Macro level. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 35 Events Impacting Companies & Their Stock Company Level Industry Level Macro Level* 9 New product release 9 Regulation changes 9 Interest rates rise/fall 9 Change in management 9 New Competitors enter market 9 Unemployment 9 Global recession 9 Raw material price changes 9 Currency Changes 9 Technological changes 9 Political developments 9 Current Events Explain the term “macro” in this context as large-scale (national, global) events. 4. Further illustrate with the following examples of specific Company-level factors: 9 Netflix, Inc. (NASDAQ: NFLX) Shares peaked at about $300 in the summer of 2011 and fell to around $70 by the end of that year. - The CEO, Reed Hastings, changed the Company’s pricing structure and split the firm’s online side of the business from the physical delivery services. - The market did not respond favorably to these decisions. 9 Sears Holdings Corporation (NASDAQ: SHLD) Sears ended 2010 trading above $70/share. Shares have been cut in more than half since then. - The stock had already been in decline for several years. Even as the retail sector gained, Sears did not. - Some market followers criticize the hiring of CEO Lou D’Ambrosio, who had no prior experience in the retail sector. 5. Shift to illustrate the following examples of how Industry-level and Macro-level events can impact stocks overnight and/or over time. 9 September 11th. On 9/17/01, the Dow fell by over 7% - the largest one-day drop in history. It was driven by the 9/11 terrorist attacks on the US. Investors did not know what the future held, or if more might follow. Accordingly, many people sold and got out of the US stock market. Prices fell significantly as a result. 9 Lehman Brothers Bankruptcy. In 2008, Lehman Brothers filed for bankruptcy. When it filed, the company had over $600 billion in debt, making it the largest bankruptcy filing in history. Lehman was the fourth-largest investment bank and had 25,000 employees across the world. When the company collapsed, markets fell across the entire world as investors sold their shares out of fear of what might happen next in the financial markets. 6. Ask students if they can think of other current events – global, local, or national, that impact their stock and/or the company. Ask them to explain how. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 36 7. Inform students of the following: 9 There is a relationship between trading volume and company, industry & macro news. 9 Some news leads to a short-term market response, while other news is indicative of a longerterm trend that may impact the company’s fundamentals permanently. 9 In general, the markets don’t like uncertainty, and investors are always trying to predict the future. 9 When information becomes available about what the future might look like, the market typically responds. CYCLICAL VS. DEFENSIVE STOCKS (15 MINUTES) (OPTIONAL) 1. Group students into teams of 2-3 and have them work together to create a list of five products or services they would no longer purchase if their household income was drastically reduced. Have them generate a separate list of five products they would continue to buy. 2. After five minutes reconvene the class to debrief on their lists. 3. Lead students in a brief discussion to compare and contrast the lists and tie the lists back to the concepts of CYCLICAL and DEFENSIVE STOCKS: 9 Cyclical Stocks – The prices of cyclical stocks tend to move in the same direction as the overall economy. They increase in good times and decrease in recessionary times. When times get tough, consumers tend to pull back on their spending with these companies. When times are good, consumers spend more with these firms. - Examples include companies in industries like automotive, entertainment, airline, travel, fashion, and furniture. - People spend money on these sorts of things when times are good and they have money to spare. 9 Defensive Stocks – The price of defensive stocks tend not to change dramatically compared to the business cycle. They are steady and reliable even in economic downturns. They are typically companies who sell goods and services that are basic necessities that people cannot go without. - Examples include companies that sell the kinds of products you need to live your life every day: utilities, food & beverage, hygiene products, etc. People spend money on these sorts of things even when times are hard and they don’t have money to spare. - These stocks are less sensitive to economic cycles. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 37 REVISITING BETA (10 minutes) 1. Revisit the concept of BETA. Remind students that one way to evaluate a stock price is to look at its volatility compared to the overall market. That is, is the stock more or less volatile than other stocks? 2. Beta is a measure traders use to evaluate a stock’s volatility. 3. Review how to interpret beta statistics: If Beta =1 9 Company is perfectly aligned with the market. It is as volatile as the market. If Beta <1 9 If Beta > 1 Company is less volatile than the market (less risky). 9 Company is more volatile than the market (more risky). 4. Ask students to predict how beta aligns with risk profiles. Conservative & Moderate 9 Aggressive Company is perfectly aligned with the market. It is as volatile as the market. 9 Company is more volatile than the market (more risky). 5. Provide an example of how a stock with a high beta will react compared to the overall market. 9 A stock with a beta of 1.7 will rise 17% if the overall market rises 10%. 9 It will fall 17% if the overall market falls by 10%. 6. Reinforce that it is essential to look at stocks in the larger context SECTORS, INDUSTRIES, & COMPANIES (20 MINUTES) 1. Explain the importance of the SECTOR and INDUSTRY on the stock price. 2. Inform students that, sometimes, if an industry receives bad press, it may affect all the stocks in that industry. 9 That is, even if an individual company is performing well and maintaining strong fundamentals, if the market is pessimistic (“BEARISH”) about the industry, that company’s stock may take a hit. Conversely, if the market is optimistic (“BULLISH”) about a certain industry, an individual company within that industry may benefit, even if their performance does not merit the boost in stock price. 3. Pass out the “Sectors, Industries, and Companies” handout. Have students’ pair-share to read through the handout. 4. Ask students: 9 Which sectors are you familiar with? 9 Which are new to you? 9 Which sectors, industries, or companies jump out at you? 9 Which do you feel most comfortable with? 9 Which ones might you want to follow? 5. Direct students to Yahoo or Google Finance or project it for the class. Have students review the top stories. Ask students to identify which stories are company-specific, industry-specific, and macro. Ask them to discuss the potential effect of some of the stories on specific stocks, industries, or the market as a whole. 6. Wrap-up this section by informing students that, as they look to come up to speed on and stay abreast of their potential investments, they should try to get an overall sense for their company’s U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 38 industry and sector, the trends currently impacting that sector, and potential sector- or industrylevel risks. YOUR COMPANY’S CONTEXT AND CONNECTIONS (20 MINUTES) 1. Pass out the “My Company in Context” handout. 2. Build on the ideas introduced earlier in the lesson about context. Reiterate that as an investor it is important to understand the larger context of the companies in one’s portfolio. 3. Tell students that they will have time to research one or two of the companies from their portfolio (Alternatively, students can choose other stocks from Google Finance if they prefer). Advise students to look at stocks that are listed on the NASDAQ or NYSE markets. 4. Allow students to explore sector and industry news regarding their companies’ sectors and industries through Yahoo or Google Finance, and the internet. 5. After 20 minutes, reconvene the class and ask students to take turns sharing their research by giving a brief summary of the company’s industry and macro context. Lead students to compare and contrast their company findings. 6. Ask students to reflect on what insights they learned about their companies by researching the broader contexts in which they operate. If they were to create their final portfolio today, would they have chosen these companies? Why or why not? Parking Lot (5 minutes) Allow five minutes for students to ask or follow-up on questions related to the days’ topic or about money management in general. Closing Bell (Optional) Using the Closing Bell list provided by Magnetar Academy, you can either use this time to teach one of the 5-minute Mini-Lessons on the stock-related concept, OR look up the "stock of the day" on Yahoo or Google Finance with the class and project the page (if possible). Discuss recent news, performance, and other matters (e.g. industry announcements) related to stock’s performance. Alternatively, use the Wall Street Journal newspaper and read from it to the class. i ii http://www.google.com/finance http://finance.yahoo.com/ U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 39 U3LP4 Handouts Sectors, Industries, & Companies Conglomerates Consumer Goods Industrial Goods Basic Materials SECTOR EXAMPLES OF INDUSTRIES 9 Agricultural Chemicals 9 Aluminum 9 Chemicals 9 Coal 9 Aerospace & Defense 9 Construction 9 Agriculture 9 Apparel & Accessories 9 Appliances 9 COMPANIES INCLUDE: 9 Gold 9 Monsanto 9 BASF 9 Copper 9 Haliburton 9 BP 9 Oil 9 Exxon Mobil 9 Chevron 9 Gas 9 Machinery 9 KB Home 9 Boeing 9 Mobile Homes & RVs 9 Lockheed Martin 9 Deere 9 Caterpillar 9 3M 9 Goodrich 9 Furniture & Fixtures 9 Mattel 9 Coach 9 Jewelry & Silverware 9 K-Swiss 9 Ralph Lauren 9 Goodyear Tire 9 Toyota Tools 9 Photography 9 Nike 9 Sony 9 Audio & Video Equipment 9 Recreational Products 9 Ford 9 Kraft Foods 9 Automotive 9 9 Coca Cola 9 General Mills 9 Footwear Textiles - Non Apparel 9 Procter & Gamble 9 Beverages (Alcoholic) 9 Tires 9 PepsiCo 9 Food Processing 9 Office Supplies 9 Personal & Household Products 9 Tobacco 9 Mitsubishi Corporation 9 Sungame Corporation 9 Vesuvius 9 Beverages (NonAlcoholic) 9 Crops 9 Fish/Livestock 9 Conglomerates U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 40 Financial Healthcare 9 Banks 9 9 Real Estate Development Insurance Companies 9 Brokerage firms Services 9 Prudential 9 Wells Fargo 9 Goldman Sachs 9 Fifth Third 9 Morgan Stanley 9 Humana 9 Cigna 9 WellPoint 9 CBS 9 CVS Caremark 9 Walgreen 9 DreamWorks Animation SKG Credit Services 9 Biotechnology 9 Medical Research 9 9 Drug Manufacturers 9 Long-Term Care Facilities Johnson & Johnson 9 Merck 9 Medical Equipment 9 Hospitals 9 Pfizer 9 Business Services 9 Resorts & Casinos 9 9 Grocery Stores 9 Airlines Intercontinental Hotels 9 Wal-Mart 9 Target 9 Dollar General 9 Dollar Tree 9 AT&T Verizon 9 Whole Foods 9 eBay 9 McDonalds 9 Delta Airlines 9 Domino’s Pizza 9 Southwest Air 9 United Parcel Service (UPS) 9 Union Pacific 9 FedEx 9 Technology Bank of America 9 9 Utilities 9 Restaurants Publishing 9 Entertainment 9 Apparel Stores 9 Advertising Agencies 9 Air Courier 9 Airline 9 Railroads 9 Wireless Communications 9 Software 9 Internet Information Providers 9 Personal Computers 9 Telecom Services 9 9 9 9 9 Railroads Security & Protection Services Broadcasting – Radio and Television 9 Movie Theaters 9 Trucking 9 Water Transportation 9 Semiconductor 9 Sprint 9 IBM 9 Long Distance Carriers 9 Dell 9 Nintendo 9 Apple 9 Motorola 9 Multimedia & Graphics Software 9 Hewlett-Packard 9 Cisco 9 Diversified Electronics Electric Utilities 9 Water Utilities 9 Exelon 9 Gas Utilities 9 Diversified Utilities 9 International Power American Water Works 9 United Utilities Group *Note that different investment websites and companies may categorize industries and sectors differently. The information above was taken from Yahoo Finance. U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 41 My Company In Context Complete the worksheet as you research the companies in your stock portfolio. Look for answers to the following questions: 9 What industry is the company in? 9 What are current economic trends in that industry? 9 What macro trends currently impact this company? 9 What unexpected events could impact the company in a positive or negative way? Company Name and Ticker Symbol Sector Industry Industry Leader(s) & Key Competitors Industry Trends and Outlook Current Challenges and Risks NEWS AND NOTES U3LP3: Context and Connections 2015-16 © Copyright Magnetar Youth Investment Academy 42 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 5: Stock Analysis (1) Duration: 95 minutes Lesson Summary Students will build on their credit-analysis experience in Unit Two and apply this to stock evaluation. Students will begin to read and interpret stock prices and stock charts using online and offline resources. Lesson Objective(s) à Evaluate a company’s fundamentals. à Interpret a stock table and explain the terms therein. à Utilize online stock analysis tools. Lesson Materials Google Finance Handouts and Resources: 9 9 9 9 9 i Exploring the Company’s Fundamentals Sample Stock Table How to Read a Stock Table Magnetar Academy Stock Universe* Company Analysis Worksheet *The Magnetar Academy Stock Universe is used in multiple Lesson Plans and is located in the Curriculum Binder as a separate insert and can also be found on the Instructor Portal under “Other Program Documents” Warm-Up Activity (5 minutes) 1. Ask students to consider what they would look for in a company before choosing to invest in its stock. What would they want to know? Guide a group brainstorming activity to uncover some of the following, and write them on the board for reference. 9 High-quality products and services. 9 A strong potential customer market. 9 Company is in an industry that is performing well with a strong future outlook. 9 Company has performed well over time (i.e., strong track record). 9 Projected growth in earnings and/or strong record of paying dividends. 2. Explain to students there are no guarantees, but there is a wealth of information available for investors to research companies and their respective stocks to make informed investment decisions. U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 43 Learning Activity (90 minutes) EVALUATE THE FUNDAMENTALS (25 MINUTES) 1. Use the ideas generated in the Warm-Up Activity as a jumping off point for evaluating a company to determine whether it’s a good investment. 2. Explain that the “Fundamentals” of a company typically include the exploration of a company’s operating and financial performance. 3. Distribute the “Exploring the Company’s Fundamentals” handout. 4. Walk through the components of the handout together. 5. Inform students that the class will evaluate Apple’s stock together. 6. Have students reference Google Finance and search for the company, Apple (Nasdaq; AAPL). Allow students a few minutes to familiarize themselves with the site. 7. Using Apple as an example company, guide students through the evaluation process outlined in the Exploring the Company’s Fundamentals handout. Follow the prompting questions in the handout to drive a discussion while referencing the company’s financials online. 8. Review the tips at the bottom of the handout and emphasize strategies that minimize the risks inherent in stock investing. 9. Wrap up this part of the lesson by reiterating that students can use this approach to evaluate any public company. THE PRICE-TO-EARNINGS (P/E) RATIO (20 MINUTES) 1. Inform students that, in addition to examining a company’s fundamentals, they can also look at its stock price and performance to get a sense for how the stock is doing in the market relative to other companies. No matter how good the company is doing, an investor still has to look at price. 2. Write on the Board “P/E RATIO”. Ask students if they’ve heard the term and what they think it may refer to. 3. Inform students that the PRICE TO EARNINGS RATIO is the most common metric investors look to as a proxy for how much the market values a stock. 4. Remind students of the importance of COMPANY EARNINGS (the BOTTOM LINE) in stock investing (shareholders own a claim to the Company’s future earnings). 5. Write the equation on the board: 9 P/E = Stock Price for one share Company’s Earnings per one share (EPS) 6. Explain the following about P/E Ratios: 9 Earnings Per Share (EPS) – the denominator – shows how much in earnings an investor “owns”. 9 The higher the P/E Ratio, the more investors are willing to pay per dollar of earnings. 7. Explain that, in order to be meaningful, a company’s P/E Ratio must be looked at in context of other company’s P/E Ratios. 9 It’s helpful to compare P/E ratios across other companies in the same industry, or to its own historical P/E. 9 Industries that are high-growth tend to have higher P/E ratios than slower-growth, more mature industries. 9 For example, P/E Ratios of technology companies tend to be higher than those of utility companies because they are considered to be higher growth. U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 44 9 If a P/E is not listed, that means the company has negative earnings (net loss). 8. Walk students through the following examples: 9 If the price of a stock is $2.00, and the EARNINGS PER SHARE (EPS) is $1, the P/E would be 2.0. That means you are paying two times earnings for the stock. 9 If the current price is $35 for one share and the past 12 months EARNINGS PER SHARE (EPS) were $3.50 the P/E is 10. 9. Have students refer back to Apple’s stock page online. Locate Apple’s EPS and P/E Ratio. Look at Apple’s industry classification, locate the Industry P/E Ratio, and compare Apple’s P/E to that of its industry. What’s in Your Portfolio? 1. Break students out into their Opening Bell investor groups from Units One & Two. 2. Ask students to use Google Finance to find the P/E ratio of each of the stocks in their portfolio. 3. Instruct students to compare P/E Ratios of their stock with the ratios of their fellow “investors-intraining”. Remind students their comparisons are most meaningful if they compare stocks within the same industry. For example, each student can start by comparing the ratios of their tech stocks. 4. Invite students to discuss how the market is valuing their companies comparatively, based on the P/E ratios. HOW TO READ A STOCK TABLE (20 MINUTES) 1. Explain that stock tables are published daily in newspapers including The Wall Street Journal or the New York Times. 2. Pass out the “Sample Stock Table and How to Read a Stock Table” handouts and project it in front of the class so students can follow along as you walk through it. 3. Walk through the visual with the class. Explain each column of the stock chart. U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 45 Columns 1 & 2: 52-Week High and Low The highest and lowest prices at which a stock has traded over the most recent 12 months. Column 3: Company Name This shows the name of the company, abbreviated. Column 4: Ticker Symbol The ticker symbol is the short-cut ID assigned to the company. Column 5: Dividend Per Share This indicates the annual dividend payment per share. If it is left blank, then the company does not pay out dividends. Column 6: Dividend Yield The percentage return on the dividend (the annual dividend per share divided by price per share). Column 7: Price/Earnings Ratio This is calculated by dividing the current stock price by earnings per share from the last four quarters. Column 8: Trading Volume This reflects the total number of shares traded for the day, listed in hundreds. (Just add “00” to get the actual number traded.) Column 9 & 10: Day High and Low This shows the highest and lowest prices for which the stock traded for the day. Column 11: Close The price at which the stock sold for the last trade of the day. Column 12: Net Change This is the dollar value change in the stock price from the previous day's closing price. If the stock is "up for the day," its net change was positive. 4. To summarize, ask students to identify which of the columns on the Stock Table fall into each of the following four categories: Naming; Pricing; Trading Volume; and Dividend Activity. Inform them of the following points within each category: U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 46 Naming (Columns 3 & 4) 9 Company Name & Ticker Symbol. 9 Stock tables are typically organized in alphabetical order according to the Company Name. Pricing 9 52-week highs/lows show the level of volatility over the past year. (Columns 1, 2, 7, 9, 10, 11, 12) 9 Price-to-Earnings Ratio. 9 Daily highs/lows show the volatility within the day, as does the Net Change number. 9 Close. 9 Ask students to compare and contrast the trading volumes of the companies in the table; point out the company with the lowest trading volume (1,500) and the highest (3,102,800). 9 Inform students that trading volume is, to some extent, a measure of Liquidity for the stock. If trading volume is high (e.g. over 50,000), that means there is a lot of buying and selling activity going on. 9 Remind students that investors can reinvest any dividends they earn to purchase additional shares and grow their portfolio accordingly. Trading Volume (Column 8) Dividend Activity (Column 5 & 6) RESEARCH A COMPANY USING GOOGLE OR YAHOO FINANCE (25 MINUTES) 1. Pass out the “Company Analysis Worksheet”. Walk through the sections of the handout together with students, and guide them through where to find the corresponding data using Google or Yahoo Finance. As a class, enter in the ticker for Apple, and pull up its stock page. 9 Company Overview: Do a walkthrough of the home (Summary) page of the stock. Point out the following to students: i. Related Companies (competitors) ii. Sector & Industry iii. Description of the Company iv. Officers Optional: Click onto the Industry link. Walk through features of the Industry page with the class. 9 Financials: On the stock’s home (summary) page, point students to the “Financials” Link on the left hand side of screen (under the “Company” tab). Point out the links at the top of the Financials page that link to the income statement, balance sheet, and cash flow. - Show students how to shift from quarterly data to annual data. - Guide students back to the stock’s summary page. Point to the gross margins and operating margins on the right-hand side of the page. U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 47 9 Stock Data: Guide students back to the stock’s summary page. Walk through where to find the following: - Exchange & Ticker Symbol - Stock Price; P/E Ratio - Earnings Per Share - Div/Yield - 52 Week High/Low - Have students click on the “Industry” link. Guide them to the P/E ratios of the Company’s competitors and industry. 2. Pass out the “Magnetar Academy Stock Universe” handout. Inform students that they will choose one stock from the universe to analyze today. Allow them to work in pairs if they’d like. 3. Remind students of the Peter Lynch theory of stock selection. (Invest in what you know.) 4. Pass out the analysis tools and allow students to get to work! Have the students refer back to the Explaining the Company Fundamentals handout as a reference. They should complete the Company Analysis Worksheet on their stock using Google or Yahoo Finance. 5. Circulate the room as teams do their research and field questions that come up. 6. After 20 minutes bring the class back together and call on a pair of students to share their research and investment analysis. At Home Students should monitor their stock for the next two weeks. They should follow the stock’s closing quote each day, as well as any stock news. Closing Bell (Optional) Using the Closing Bell list provided by Magnetar Academy, you can either use this time to teach one of the 5-minute Mini-Lessons on the stock-related concept, OR look up the "stock of the day" on Yahoo or Google Finance with the class and project the page (if possible). Discuss recent news, performance, and other matters (e.g. industry announcements) related to stock’s performance. Alternatively, use the Wall Street Journal newspaper and read from it to the class. i http://www.google.com/finance U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 48 U3LP5 Handouts Exploring The Company’s Fundamentals Use the following framework to investigate companies that you’re considering as investments. Remember the Peter Lynch theory of stock selection – “Invest in What You Know.” Evaluate What to Look For 9 What does the company do? 9 How do they make money? (e.g., do they sell a product, invent technology, sell a service, combination?) 9 Is demand for their product increasing? 9 Are the company’s products & services high quality? 9 What are the prospects for the industry? 9 Who are the company’s major competitors? 9 What do the overall financials tell us about the health of a company? 9 Have sales been increasing over time? 9 How does revenue compare to costs? 9 Profitability: What are the Gross Margins, Operating Margins, and Earnings? 9 Does the company have a lot of debt relative to its size? The Business The Industry The Financials The Ideal Company Of course, there is no such thing as the ideal company. When it comes to investing there is always some amount of risk involved. However, there are strategies you can take to minimize those risks and help you identify the most promising companies. Tips! 9 Look for companies that offer a high quality product or service that you (and people you know) know and use regularly. This means you likely have a stronger understanding of the industry, as you are part of the customer market. 9 Target companies in growth industries. 9 Look for companies that have shown strong financial performance over time. 9 In an economic downturn, target companies that make products people always need even when times are tough (i.e., staples not luxuries). 9 Red Flags include: o Earnings slowing or declining o Sales slowing; Management selling stock o Companies that are getting too much press o Prices much higher than their industry peers o Too much debt (Current Assets/Current Liabilities should exceed 2x) U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 49 Sample Stock Table Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11 Column 12 Columns 1 & 2: 52-Week High and Low The highest and lowest prices at which a stock has traded over the most recent 12 months. Column 3: Company Name This shows the name of the company, abbreviated. Column 4: Ticker Symbol The ticker symbol is the short-cut ID assigned to the company. Column 5: Dividend Per Share This indicates the annual dividend payment per share. If it is left blank, then the company does not pay out dividends. Column 6: Dividend Yield The percentage return on the dividend (the annual dividend per share divided by price per share). Column 7: Price/Earnings Ratio This is calculated by dividing the current stock price by earnings per share from the last four quarters. Column 8: Trading Volume This reflects the total number of shares traded for the day, listed in hundreds. (Just add “00” to get the actual number traded.) Column 9 & 10: Day High and Low This shows the highest and lowest prices for which the stock traded for the day. Column 11: Close The price at which the stock sold for the last trade of the day. Column 12: Net Change This is the dollar value change in the stock price from the previous day's closing price. If the stock is "up for the day," its net change was positive. U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 50 How to Read a Stock Table U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 51 Company Analysis Worksheet Use the following to collect information on the Company you are evaluating. COMPANY OVERVIEW: Company Name: Industry: Business Description (Products & Services): CEO (Chief Executive Officer): Key Competitors: Customers: THE FINANCIALS: Most Recent Year’s Sales (Revenue): Over the past three years, have sales been growing? What is the trend? Most Recent Year’s Earnings (Net Income): Over the past three years, what has been the Earnings trend? Growing? Declining? Stagnant? Profitability: Gross margin? Operating margin? U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 52 STOCK DATA: Exchange and Ticker Symbol: Stock Price: P/E Ratio: How does the company’s P/E compare to its industry and competitors? Earnings Per Share (EPS): Does the company pay Dividends? 52-week High and Low: How close is the stock currently trading to its 52-week high or low? INVESTMENT SUMMARY Investment Merits Key Risks and/or Red Flags Company Overall Industry Financials Stock History U3LP5: Stock Analysis (1) 2015-16 © Copyright Magnetar Youth Investment Academy 53 UNIT 3: INVESTING AND THE STOCK MARKET Lesson Plan 6: Stock Analysis (2) Duration: 90 minutes Lesson Summary Students will build on their credit-analysis experience in Unit Two and apply this to stock evaluation. Students will begin to read and interpret stock prices and stock charts using online and offline resources. Lesson Objective(s) à Interpret a company’s stock chart and explain the terms therein. à Identify and utilize online stock analysis tools. Lesson Materials Google Finance Handouts and Resources: 9 9 9 vii Apple Stock Chart My Stock Sheet Magnetar Academy Stock Universe* *The Magnetar Academy Stock Universe is located in the Curriculum Binder as a separate insert and can also be found on the Instructor Portal under “Other Program Documents” Warm-Up Activity (5 minutes) 1. Have each student name the company they have been following. 2. Allow students to report on any activity that has occurred with their stock since the last class session. Learning Activity (80 minutes) INTERPRETING A STOCK CHART (30 MINUTES) 1. Explain to students that there are many different kinds of stock charts. 2. Inform students that today they will interpret stock charts from Google Finance. 3. Pass out the “Apple Stock Chart” handout. 4. Ask students if there are any fields on the chart they recognize, and to try to recall their definitions. 9 Company Name 9 Ticker Symbol 9 Volume 9 Market Capitalization 5. Ask students which fields are new to them? Can they predict their meanings? 6. Walk students through each of the definitions. Make the following points after each respective definition has been read: U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 54 Volume 9 Ask students to recall the TRADING VOLUME from the previous lesson about stock tables. 9 If a stock’s trading volume is unusually active on a certain day, it may be because some recent news has come out that has led investors to either unload a particular stock (if it’s bad news), or buy the stock (if it’s good news). Average Volume 9 Knowing the AVERAGE VOLUME over the past month can help you decide when the daily volume is active enough to warrant notice. Market Capitalization 9 Review the concept of MARKET CAPITALIZATION (Market Cap) with students. Ask if anyone can recall what it means. 9 Market Capitalization is another way to think about the size – or the total value – of a company based on its stock. 9 Market Capitalization is used to figure out if the company is considered LARGE-CAP; SMALLCAP; or MID-CAP. 9 If someone were to buy the whole company, they’d have to buy all the stock. How much would it cost – If you multiply the stock price by all the shares of the company, you get the Market Capitalization. 9 Smaller-Cap companies are sometimes considered more volatile (risky), but also highergrowth. That said, there are lots of examples of very large companies that have gone under. 9 BETA is a formula that traders use to evaluate a stock’s volatility. 9 Beta measures whether a stock is more risky or less risky than the overall stock market. 9 If beta=1, the stock’s volatility is perfectly correlated with that of the market. That is, if the market as a whole is down 10%, that stock will also be down 10%. 9 If beta is higher than 1, the stock is more volatile than the market. That is, if a stock’s beta is 1.5, this means that when the entire market is down (or up) by 10%, this stock’s price will be down (or up) by 15%. 9 Typically, large “blue-chip” companies have lower betas. Beta MY STOCK SHEET (25 MINUTES) 1. Have students get online to pull up the stock charts of their respective stocks on Google Finance. 2. Pass out the “My Stock Sheet” handout. Have each student fill out the handout based on their own stock. Students can do this in pairs or groups if they’d like to work together. 3. If students are not already in groups, have them pair-share and talk to one another about what they are finding about the stock they are researching. Instruct them to compare and contrast their respective companies. U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 55 ADDITIONAL ANALYSIS (25 MINUTES) 1. If there is additional time left, have students either: 9 Complete their Company Analysis Worksheet from the Stock Analysis I lesson; or 9 Begin to research other companies within the Magnetar Academy Stock Universe. 9 Have extra copies of the Company Analysis Worksheet and the My Stock Sheet handouts in case they are needed. Closing Bell (Optional) Using the Closing Bell list provided by Magnetar Academy, you can either use this time to teach one of the 5-minute Mini-Lessons on the stock-related concept, OR look up the "stock of the day" on Yahoo or Google Finance with the class and project the page (if possible). Discuss recent news, performance, and other matters (e.g. industry announcements) related to stock’s performance. Alternatively, use the Wall Street Journal newspaper and read from it to the class. vii http://www.google.com/finance U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 56 U3LP6 Handouts Apple Inc Stock Chart Apple (NASDAQ:AAPL) Range 440.20 - 449.99 Div/yield 52 week 385.10 - 705.07 EPS Open 440.80 Vol / Avg. 8.87M/11.45M Mkt cap 406.79B P/E Shares 3.05/2.72 40.04 908.44M Beta 0.98 Inst. own 64% 11.18 Range The range that a stock’s price has varied by over the course of the day. 52wk Range The range of prices a stock has sold for over the course of the last twelve months. Open The price of the first share of stock sold today. Volume/Average Volume Trading volume is the total number of shares of that stock that have been traded throughout the day. Average volume is measured over the last 30 days. Market Capitalization The total dollar value of the company’s stock. It’s determined by multiplying the total number of shares by the share price. P/E Price-to-Earnings Ratio - the relationship between the price per share and the income earned per share by the company. It is the share price divided by the Earnings-PerShare (EPS). Div & Yield The dividend is the most recent payment the company pays to shareholders based on its profits. The yield is the dividend expressed as a percentage of the share price. EPS The amount of Earnings (Net Income) the company made over the past 12 months, divided by the number of shares the company has outstanding. Shares Outstanding The total number of shares currently owned by investors. Beta A measure of volatility of a stock, relative to the larger market. Beta tells you whether a stock is more volatile (risky) than the market as a whole, or less risky that the market as a whole. Institutional Ownership The percentage of shares that are held by Institutional investors (e.g. investment companies), as opposed to individual investors. U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 57 My Stock Sheet Company Name My Notes and Observations Stock Ticker Day’s Range 52wk Range Opening Price Volume Avg Volume Market Capitalization P/E Ratio Div & Yield EPS Shares Outstanding Beta What stands out to you most about this stock? What concerns you? Given your fundamental analysis, does anything in this stock analysis surprise you? Does this data change or confirm your thoughts about the investment merits and risks of this Company? Are there any new risks and/or merits you have discovered by analyzing the stock activity? U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 58 Unit Three Quiz Name: Date: Instructor: Question 1 Identify one way in which investing is different from saving. (1 point) Question 2 Explain, in your own words, the relationship between risk and reward in investing. (1 point) Question 3 Which of the following has the HIGHEST level of risk? (1 point) a) A Certificate of Deposit c) A bond issued by Apple b) A share of IBM Stock d) A United States Savings Bond Use Elissa’s Investment Profile to answer Question 4 Elissa Age: 32 Current Investments Percentage of Overall Investments Cash Investments 35% Bonds 50% Stocks 15% Question 4 Is Elissa’s portfolio conservative, moderate, or aggressive? Explain. (2 points) U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 59 Use Juan’s Investment Goal Profile to answer Question 5: Juan Age: 26 Financial Goal: Invest to buy a house Time Horizon 12 years Risk Tolerance Aggressive Priority Growth Question 5 a) What saving or investment vehicles would you MOST suggest that Juan include in his portfolio to meet his goals? (Choose one) (1 point) I. Stocks II. Bonds III. Certificate of Deposit b) Explain why your recommendations align with the elements of Juan’s profile. (I point) Question 6 Why does a company decide to ‘go public’? What is one benefit of becoming a publicly traded company? (1 point) Question 7 Identify one factor that can drive the price of a Company’s stock in the market: (1 point) Question 8 Jimmy just bought stock in a relatively small company (currently valued at $400 million dollars) that has invented a new kind of computer chip technology. Because this company is investing all of its money into growing the business, they do not pay a dividend to investors on a regular basis. What kind of stock did Jimmy invest in? (1 point) a) A large cap income stock c) A small cap growth stock b) A small cap income stock d) A large cap growth stock Question 9 Estelle is looking at a company’s fundamentals to determine whether or not she should invest in its stock. List one thing Estelle should look at as she analyzes this company, and why it is important. (2 points) U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 60 Question 10 Match the stock table terms on the left with their definitions on the right: (7 points) a) The price of a share of stock divided by the company’s earnings per share for the P/E last year. Yld% 52-Week High and Low Change b) The highest and lowest price for the stock during the past year. c) The difference between the last trade and the previous day’s price. d) The yield, or rate of return, on a stockholder’s investment. e) The total dollar value of a company’s stock, determined by multiplying the total number of shares by the share price. Beta Volume Market Capitalization f) A measure of volatility of stock. This number tells you whether a stock is more volatile (risky) than the market as a whole g) The total number of shares of that stock that have been traded the day. Question 11 Jon talks to you about a company that is the global leader in sunscreen. This company’s stock is: (1 point) a) Cyclical stock b) Non-Cyclical/ Defensive stock Question 12 a) What is one macro-level risk factor that could affect the worth of Jon’s stock in the sunscreen sector? (1 point) b) What is one industry-level risk factor that could affect the price of Jon’s stock in the sunscreen sector? (1 point) Total Points: ______ U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 61 Unit 3 Quiz – Answer Sheet Total Points Possible: 22 Q Answers and Sample Student Responses 1 The interest rate earned on a savings account is lower than the rate of inflation, therefore over time your money can actually decrease in value. Investing allows you to keep up with inflation and have your money grow. And so, the compound returns from successful investing are much higher than saving. Another difference is that investing implies taking on risk of losing the money you invested. Savings should be done with less or no risk. 2 Generally, the greater the potential for an investment to increase substantially in value, the greater the risk it might also drop substantially. 3 B - A share of IBM Stock Points Lesson Origin Lesson Objective(s) 1 1 Compare and contrast saving and investing 1 1 Describe the relationship between risk and reward in investing. 1 1 Differentiate between stocks, bonds, and cash investments. 2 2 Differentiate between conservative, moderate and aggressive risk profiles. 4 Elissa has a Moderate portfolio profile. This is apparent because she has some, though a minimum amount, of her investments in stocks (the riskiest kind of investment) and has most of her money in bonds and cash investments. This profile suggests that she is interested in taking some risks, but still wants to make some predictable investments, both of which are key components to a moderate profile. 2 2 5 5a) Stocks 5b) Juan has a long time horizon to buy a house, so he can be somewhat more risky with his investments, and ride out any short-term losses. Additionally, given that his risk tolerance is aggressive and he wants to see growth, investing in stocks is his best option. While stocks carry the greatest investment risk, they also have the highest potential for growth and reward for an aggressive investor like Juan. Match saving and investment vehicles to financial goals and risk profiles; Differentiate between short and long term investment horizons and corresponding strategies. 1 3 6 A company that is publicly traded may be able to raise more money by allowing the general public to purchase stock and become investors Explain how the stock market works and what drives prices. 1 3 7 One factor that may drive the demand to buy or sell a company’s stock might be the market expectations of the company’s earning potential Explain how the stock market works and what drives prices. 8 C - A small cap growth stock 1 3 2 5 9 Possible answers include: The strength and the outlook of the company’s Industry; The company’s competitors; Their customers; the company’s financials; trends in sales and earnings; the company’s products and whether or not there is an increasing demand. Differentiate between different kinds of stock. Evaluate a company’s fundamentals. U3 Stocks & Investing Unit Quiz 2015-16 © Copyright Magnetar Youth Investment Academy 62 Q Answers and Sample Student Responses 10 A - P/E D - Yld% B - 52 Week high Low C – Change F – Beta G – Volume E - Market Capitalization 11 A – Cyclical stock 12 a) One macro-level factor that could affect the price of Jon’s investment in the sunscreen sector is global weather patterns. For instance, if a cold front hits the United States and summers are shortened, people may be less likely to purchase sunscreen. If expected demand for sunscreen declines, this would negatively affect the stock price. b) One possible industry-level factor might be new restrictions imposed by the government on sunscreen ingredients and/or formulation. If the market believes that the required change in the product will be hurt future profits of sunscreen companies, the stock prices will go down. U3 Stocks & Investing Unit Quiz 2015-16 Points Lesson Origin Lesson Objective(s) 7 5 and 6 Interpret a stock table and explain the terms therein. 1 4 2 4 Analyze how economic and business factors affect the market value of a stock. Analyze how economic and business factors affect the market value of a stock. © Copyright Magnetar Youth Investment Academy 63