The Stock Market Game Guide: Stocks and Mutual Funds
Philip Barham
California Field Consultant
February 2006
This guide follows a simple plan. Each lesson will be organized with the following
components: an opening problem or questions, computer explorations, a summary and
homework ideas. The lessons are designed to flow sequentially and provide your students
with the tools they need to make basic investment decisions. It is up to individual teachers
to decide how to use this guide – it is a suggested strategy for teaching SMG, developed
by a fifth grade GATE teacher for his classroom.
Part One of this guide is meant to help you teach your students how to buy and sell stocks
and mutual funds. Students need a strategy to be successful at the Stock Market Game
(SMG). With your help, your students can begin to make smart investment decisions and
lead their teams to success. With your assistance, your students will also learn from their
mistakes and find out how to cut their losses early and keep their winning selections. A
good investor like a good student is always revising and refining their thinking.
In Part Two, you will also be able to teach your student about investments beyond the
stock market such as CDs, bonds and real estate. Your students will learn that a good
investor is diversified among asset classes as well as in stocks. Part Two will also help
you introduce your students to economic events that impact investors such as inflation and
interest rates. Students will also learn about the advantages of tax deferred investing.
The first half of this guide is intended to provide students with sound basic investment
strategies for playing the SMG. The second half of this guide is intended to provide these
new SMG investors with more strategies to help them in the game, and to help them
understand where stock investing fits into an overall investment portfolio.
Table of Contents
Lesson 1………………………………………………………………Buying and Selling a Stock
Lesson 2……………………………………………………………….Why Stock Prices Change
Lesson 3……………………………………………………….The Importance of Diversification
Lesson 4……………………………………………….One Method of Picking a Winning Stock
Lesson 5……………………………………………………………….A Closer Look at Earnings
Lesson 6………………………………………………….Creating and Writing a Stock Portfolio
Lesson 7………………………………………………….The Cost of Buying and Selling Stock
Lesson 8……………………………………………………Buying on Margin and Short Selling
Lesson 9…………………………………………………………………….Buying Mutual Funds
Lesson 10………………………………………………When to Sell a Stock or a Mutual Fund
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Lesson 1
Buying and Selling a Stock
Opening: Present a simple stock purchase and sale problem for students to solve. For
example,
Jason (insert student’s name) bought 100 shares of IBM at $86.00 on January 3. He sells
those 100 shares three weeks later for $91.00 a share. Jason owned IBM for three weeks,
what was the result? Explain.
After students have solved the problem, discuss their findings. Find out how many believe
Jason made money. Some students may think Jason lost money. Help students
understand the problem and then explain why this problem shows Jason making a profit.
Now use this problem to discus the following terms. What is IBM? IBM is a company.
What is a company? A company is a person or group that makes something people want
to buy. What is a stock? A stock is a certificate giving the buyer part ownership in a
company. Why do public companies issue stock? A public company sells stock to raise
money to develop its business.
At this point, please explain to your students that only companies traded publicly sell stock
on the stock exchange. A stock exchange is like a public market for buying and selling
stock. Your students will primarily be using the New York Stock Exchange (NYSE) and the
NASDAQ (“Over the Counter” Exchange). Privately held companies do not sell stock to
outside investors, and thus are able to keep their operations more private.
Why did the stock go up in price? One major reason stocks go up in price is because
investors believe that a company is earning money more quickly than in the past. In this
case, more and more investors want to buy the stock that increases demand and naturally
the supply of stock available to buy decreases. This imbalance drives up the stock price.
The stock price will continue to rise until the price is high enough that it motivates enough
sellers to enter the market and sell their shares. The increase in the supply of stock will at
some point satisfy the demand for a stock and cause the stock price to stop rising.
Who makes money when a stock goes up in price?
Companies only make money from the first sale of their stock to the public. This first sale
is called the Initial Public Offering (IPO). An IPO is made to raise money for a company.
Once the stock is sold to the public, an investor owns it and the investor makes or loses
money depending upon the performance of the company.
You should also explain to your students that IBM is a ticker symbol. A ticker symbol is a
short way to express a company’s name in the stock market. IBM stands for International
Business Machine. IBM is one of the few companies known by its ticker symbol. GM or
General Motors is another example. Companies with one, two or three letter in their ticker
symbol are usually traded on the NYSE. Companies with four letters in their ticker symbol
are usually traded on the NASDAQ.
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Computer Explore: Present the following chart or similar chart to students:
Company Name
1. Google
2. Apple Computer
3. Ford Motor Company
4. AT&T
5. Qualcomm
6. Sony
Ticker Symbol
GOOG
AAPL
F
T
QCOM
SNE
Demonstrate to students how to look up a company’s stock price on Yahoo or MSN by
using the ticker symbol. Enter the ticker symbol and get the stock quote. Briefly discuss
the stock quote summary page. Have the students find and record the most recent quotes
for the stocks listed above.
Also show students how to use the symbol lookup box to find the symbol of companies
they are curious about. Use Microsoft for an example. Have your students look up
companies that they are curious about and record the ticker symbols.
Ask students to create at least one word problem like the opening problem; using 100
shares of a stock from a company they researched. If needed, they may use the opening
IBM problem as a model.
Summary: Discuss student findings. Make sure to review what a company does and why
they issue stock. Explain that once a stock is sold to the public, its price will fluctuate
depending upon supply and demand.
Homework: Have students trade their word problems with each other for homework.
Lesson 2
Why Stock Prices Change
Opening: Present a 52-week price range of a company’s stock for students to analyze.
You can use Qualcomm (QCOM) as an example.
“If the 52 week range of QCOM stock was $ 32.08 - $49.45, what is the price
difference between its highest and lowest price last year?”
“Assume QCOM is currently selling at $47.65. How far off its 52 week high and how
far above its 52 week low is QCOM selling?”
The first question will allow you to review and discuss why stocks move in price. Remind
students that as demand for a stock increases the supply decreases and the stock price
moves up in price. The reverse is also true. If demand decreases, then supply increases
and the stock falls in price.
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A stock can be in demand for many reasons, but the one we will focus on today is earnings
growth. If a company is earning money at a faster and faster rate, then investors will be
very eager to own that company’s stock.
The second question above will allow you to review decimal subtraction. Using
Qualcomm, will also allow you to discuss the importance of buying stocks that are in an
upward trend. You always want to buy stocks that are moving up in price over time.
GM’s stock shows a company in a two year down trend. It has moved down in price over
the last two years. You do not want to buy stocks that are in a downward trend.
Use a graph of GM’s stock as an example of a down trending stock. Explain that GM is
probably moving lower in price for good reasons such as a slowing rate of earnings growth
and a slowdown in the sale of GM products due to increase fuel costs. Therefore, the
demand for the stock is low which increases the stock’s supply and drives down the price.
Computer Explore: Have students use the chart from lesson 1 and look up the 52-week
range in stock prices for those companies. They can record the range of 3 stocks from the
lesson 1 chart and then let them choose 3 stocks of their own to record. This will allow
your students the opportunity to start researching companies on their own.
Summary: Bring the students together in groups to discuss their data. Ask students to
identify stocks they found that they think are trending lower and higher. They should use
their data and calculations to support their results.
Homework: Have your students pick two stocks to follow over the next few weeks. Have
them pick one stock they think will move higher price and one they think will move lower
price based on the data they observed.
Lesson 3
The Importance of Diversification
Opening: Present the following chart of industrial sectors for your class to analyze.
Telecommunications
Financials
Consumer Goods
Health Care
Oil & Gas
Technology
Please note that this is only a partial list of industries. Ask students what companies they
might find in each of these sectors. You might anticipate Apple Computer for Technology
and Exxon for Oil and Gas.
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Below is a list of companies in each sector that your students may know.
Telecommunications: AT&T, Verizon, & Sprint
Financials: Bank of America, Wells Fargo, Merrill Lynch
Consumer Goods: Coca-Cola, Procter & Gamble
Health Care: Pfizer, Johnson & Johnson
Oil & Gas: Exxon Mobil, Chevron
Technology: IBM, Intel, Hewlett-Packard
Next put a positive or negative percentage next to each industry on your chart. This will
show how well or poorly each industrial sector did last year.
Telecommunications
Financials
Consumer Goods
Health Care
Oil & Gas
Technology
Up 3.26%
Up 9.4%
Down 2.7%
Up 11.57%
Up 44.92%
Up 15.24%
Please note that these numbers reflect the 2005 investment year. The consumer goods
number was changed for educational purposes.
Ask students how much money they would have made if they had invested all their money
in Consumer Goods or Telecommunications. Then ask them where they would have liked
to have invested their money in 2005-06. Obviously, Oil & Gas would have been the best
sector to have bought. However, it is very difficult to predict the future of any sector with
any degree of certainty. This is why savvy investors diversify across several industries.
Computer Explore: Have students learn more about diversification by looking online at
MSN finance at http://moneycentral.msn.com/home.asp.
To get to the section on diversification, have your students enter QCOM in the “Get quote
Box.” Next on the left side menu, have students click “Stock Research” under stocks.
Finally, on the next, left side menu under the “Find Stocks” section have them click “Top
Rated Stocks.” This will take you to a page where the stocks are divided into industrial
categories.
You also can get to the section on diversification directly by entering:
http://moneycentral.msn.com/investor/srs/srstopstocks.asp.
When your students are at the Top Stocks page, they can look up and record at least 2-3
companies from an industrial sector. Students should write down the ticker symbol and
what the company does so they can discuss it as a possible investment with their team.
Summary: Have students gather in their teams to discuss their findings. Explain why
many professional money managers just study one industrial sector. This allows
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professional money managers to specialize and become experts on the companies in their
sector.
Likewise you may want to assign or let you students choose one sector to study. This way
each student can be an expert in a sector for his or her team. If you have five students in
a team, then each team can cover five industrial sectors. This will allow students to
naturally diversify their team’s portfolio and make the workload manageable.
Homework: Have students write about why they think it is important to diversify into
different industrial sectors. Students should start to research companies in their particular
sector. Team members should find 3 companies in their sector to share.
Lesson 4
One Method of Picking A Winning Stock
Opening: Find the PE ratio for Qualcomm stock. A PE ratio is price/earnings or price
divided by earnings.
Qualcomm’s stock price is $48.57 and its earnings are $1.17. The PE ratio is 38 or $48.57
divided by $1.17.
Students should understand that a stock’s price changes constantly, and thus slightly
changes the PE ratio. Students should also be told that earnings per share are how much
money a company makes per share of stock. The earnings per share are released every
quarter, and thus this number will probably change each quarter.
Students should be allowed to use calculators to find PE ratios. Ask students what would
happen to the PE ratio of Qualcomm stock if the stock price went to $60 a share and the
earnings stayed at $1.17. They should see that the PE ratio for QCOM would rise to 51
($60 divided by $1.17).
Investing Tool Number 1: Carefully explain to your students that investors like stocks
where the “forward PE ratio” is less than the “current PE ratio.” This only happens when a
stock’s projected future earnings are expected to rise. The bigger the rise in future
earning, the lower the “forward PE ratio” will be. Your students should record the ticker
symbols of stocks where this is happening. With further research, this may be a stock they
want to purchase for their team’s portfolio.
For example, lets say the current price of a stock is $20 per share, the current earnings per
share are $1.00 per share and the future earnings are projected to be $2.00 per share.
Under this scenario, the “current PE ratio” for this stock is 20 and the “forward PE ratio” is
10. This drop in the forward PE ratio tells you that the company appears to be growing its
earnings, and the stock price may be increasing.
Generally, investors like a stock with rising earnings, and will invest in that stock. This
should drive up demand and the stock’s price. Finding a stock where this happens is your
students research goal during the computer explore.
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Computer Explore: As in the previous lesson, have students research stocks in the MSN
financial - Top Rated stocks page. If you have assigned students to research individual
stocks in a particular sector make sure they look for stocks in these sectors only.
Tell students to look in a sector and find a top rated stock. Then have students click on a
ticker symbol and look for stocks where the forward P/E ratio is lower than the current P/E
ratio. The greater the gap, the greater the possible future price appreciation. Have
students record stocks that they find to discuss with their group at summary. The students
should also know what the company makes and be ready to defend their choices.
For example, AOS a consumer goods company has a current PE ratio of 22.7 and a future
PE ratio of 18. This means that the company is growing earnings. AOS makes electric
motors and water heating equipment. Perhaps its recent price appreciation is related to
general growth in the economy or rebuilding taking place after Hurricane Katrina.
Summary: Ask students to explain how we find the current and forward PE ratios. Ask
students to explain how this helps them find stocks in which to invest. Then have students
share their data with their teams.
Homework: Have students work on Math Behind the Market activities in lesson 2F.
These lessons provide lots of reinforcement on calculating PE ratios. Have students look
for companies with the widest spreads between current and forward PE ratios to discuss
with their teams.
Lesson 5
A Closer Look At Earnings
Opening: Post the following questions on a chart:
“Would you like to own a stock that is growing its earnings per share at 10% or a
stock that is growing its earnings per share at 20%?”
“What are earnings per share?” Earnings per share are how much money a
company makes per share after expenses. Like the PE ratio, earnings per share are
another key ratio for successful investors to understand.
The following example should help clarify the earnings per share ratio. If a
company has $1000 of earnings and 100 shares, then it would have $10 of earnings per
share that year. The $10 is then divided by 4 quarters and the earnings each quarter
would be $2.50 per share.
“Where do you find the earnings per share for a particular company?”
This information is available on the MSN and Yahoo finance sites. Select a stock
with a detailed quote on MSN. On the left hand side click Earnings Estimates.
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Look up QCOM on MSN finance as an example. On the earnings estimates bar
chart, you can show the quarterly and yearly earnings estimates. Your students need to
focus on the yearly earnings.
On the number chart below on the earnings page, the students need to see the
average estimates for the fiscal year (FY). Please note a fiscal year for a company is
usually different from the calendar year. For example, the company may end their year in
August and start in September. The 2006 FY earnings estimate for QCOM are $1.49 per
share and for 2007 FY earnings estimate for QCOM are $1.72 per share.
On the earnings page is also the Growth Rate. This is a very important percentage
for students to learn about. This shows whether a company’s growth is picking up speed,
staying constant or slowing down.
For example, QCOM has a FY 2006 Growth Rate of 28.50% and a FY 2007 Growth
Rate of 15.68%. This shows a company whose growth rate is strong. Any company that
has an earnings growth rate of 20% or more is good. The problem with QCOM is that the
growth rate looks like it will be slowing in FY 2007. This slowing growth rate for QCOM
could keep the stock from appreciating. We will revisit this concept in the lesson on when
to sell a stock.
Investing Tool Number 2: Please have your students look for companies where the
earnings growth rates appear to be increasing from the current to the next fiscal year. This
is the second tool your students will be using to pick stocks to buy in the SMG.
Computer Explore: Create an earnings estimate chart of QCOM for students to use as a
resource.
Please have your students research the earnings estimates for various companies that
they selected with Investing Tool Number 1 at the end of lesson 4. In their stock journals
have students record: the FY 2006 and 2007 Earnings and the FY 2006 and 2007
Earnings Growth Rate for those stocks. Next have your students highlight only those
companies in their research whose earnings growth rate is increasing.
Summary: Have your students gather in their groups and discuss their findings. If
students have been assigned a particular sector, then they can make a sector report and
highlight stocks they think their team should buy. Hopefully, those stocks will demonstrate
strong earnings growth and an increasing earnings growth rate.
Homework: Have your students write a report detailing their findings and
recommendations for their team.
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Lesson 6
Creating and Writing A Stock Portfolio
Before a student team invests a single dollar they should work together and write a stock
portfolio. The plan should be diversified and display stocks that are growing their earnings
at an increasing rate. The writing should also explain what each company does and why
the team wants to buy that stock.
Teams that have member researching one sector might have each researcher write a
report on their top three companies within an industry and bring them to the group for
discussion. This would help them diversify naturally, and keep the workload manageable.
The SMG requires teams to buy at least 100 share of each company. At this point, only
allow teams to buy $50,000 of stocks. This will allow the teams to buy mutual funds later
in the game. Also introduce the five percent loss rule that is explained in lesson 10. The
five percent rule will allow students to keep their mistakes small for the SMG.
Computer Explore: Students will probably need time in the computer room to research
stocks within their industry. Have your students take notes on what their selected
companies do, their current and forward PE ratios and their earnings growth rates. They
will need this information to write their reports on their top three companies.
Summary: Meet with the teams individually to discuss their findings. Encourage your
students to do further research at home with their parents. Have students submit their
plans in writing as a team before investing.
Lesson 7
The Cost of Buying and Selling Stock
Opening: Tell your students that every time they buy or sell a stock in the SMG they will
pay a 2% commission. Ask them if they would rather pay a 5% commission? Ask them
why or why not?
Next explain that a commission is a fee an investor pays a broker every time an investor
buys and sells a stock. Teams will pay a 2% fee to the SMG broker every time they buy
or sell a stock or mutual fund.
Model a commission problem. For example, you have paid $8,100 to buy 100 shares of
IBM stock. The commission is 5%. How much would your broker’s commission be on this
purchase?
$8,100 X 0.05 = $405
This is an expensive commission. Now have students calculate an SMG commission of
2% for the same purchase.
$8,100 X 0.02 = $162
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There are other commission problems in Math Behind the Market. You may want to
assign more problems in class for your students to study.
Computer Explore: Today your students will be making their first stock purchases. Make
sure teams have their passwords and explain the necessity of keeping them secret.
Encourage them not to make any stock purchases without consulting the team and getting
your final authorization. The team should be only buying stocks from their model portfolio.
In the computer room, model for your students how to make a stock purchase. Explain to
the teams that they can set a limit price. This means that they will only buy the stock
below a certain price limit. This may keep them from paying too much for a stock. For
example, in January 2006 one team set a limit of $72.00 for their purchase of Apple
computer stock. This kept them from paying $81.00, too much for the stock.
You might suggest the teams consider a limit price of 5% below the current asking price of
the stock on 2 of their stock selections. This will allow the teams to do additional math
work and learn how limit prices work.
Make sure to have teams buy at least 4-5 stocks at their market price. This means your
students will buy the stock at the closing price for the day on Wall Street.
Summary: Discuss limit and market prices with your students. Find out what stocks they
bought and which ones they bought at a limit price. Explain that limit prices are often used
on stocks that fluctuate in price a lot on any given day.
Lesson 8
Buying on Margin and Short Selling
Opening:
Topic 1: Margin Buying
“What would happen if a team had spent their entire $100,000 and still wanted to
buy more stocks?”
The SMG resembles real life investing very closely and allows students to buy stocks on
margin. This means if the team has spent all their money and still have some stocks they
want to purchase, they can borrow up to another $100,000 from the SMG broker to buy
those stocks.
“What problems occur from borrowing money to buy stocks?”
You will want to explain to your students that borrowed money has to be paid back. Teams
will pay 6% interest per annum on any money that they borrow from the SMG broker.
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Explain that buying stocks on margin or “on borrowed money” is a powerful tool, if used
wisely. However, the team must be doing very well at picking stocks and have all their
money invested before using this tool.
Topic 2: Short Selling
Selling short is another powerful investing tool. Your teams should try to short one stock
this week.
For background, please read the article on short selling on the SMG website before
teaching this lesson.
“What would you do if you believed a stock would be going down in price and wanted to
make money from the drop in price?”
You could sell the stock first then buy it back when it was at a lower price. This is the
reverse of the typical “buy low and sell high” strategy. You borrow the stock from your
broker to sell it at a high price and then pay off your loan by buying it later at a lower price.
What is the big problem with this strategy? The major problem is when the stock goes up
in price and you lose money. If the stock never goes below the price you sold it, you have
to cover your loss by buying it at a higher price in the future.
How do you pick a stock that you think will go down in price? Look for technology
companies with a high PE ratio. This means that the stock price may be due for a
correction. If a stock’s PE ratio is above 50, it may be overpriced. The difficulty with
shorting a stock is timing. A stock with a high PE ratio can continue to trade higher for
quite awhile.
For a well-known example, have your students examine Google. Google traded higher
and higher throughout 2005 and a short sale would have failed. However, early in January
2006, a short sale of Google would have been timely. Google missed its quarterly
earnings targets in January and a series of negative articles came out in Barron’s, a
leading financial newspaper. The stock has dropped from a high of $470 a share to $345
in February of 2006. What makes shorting a stock difficult is timing the sale and purchase
just right.
Computer Explore: Present a chart on Amazon (AMZN) to your students as an example
of a stock that could be shorted.
Ask these questions in Amazon: Does the stock chart show a wavelike pattern? Is it
possible to predict a price to short the stock in the future? Yes, a good price might be $50
per share. Is there a price where you would buy it back? Yes, a good price might be $35
per share. Where is the stock trading currently?
Have your students look for stocks to short sell. First have your students look at Internet
stocks such as E-bay, Amazon, Yahoo, and Google to examine stocks that trade at a high
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PE. Next have your students look at the 1 year and 3 month trading chart for these stocks.
Ask if they can see wavelike patterns in these charts.
After you model short selling with Amazon’s stock, see if students can find similar trading
opportunities with other stocks on the list.
Summary: Have your students meet in groups and discuss their findings with each other.
Have them pick one stock to short, if they think the stock is at the top of its trading curve.
Homework: Students can look for more possible stocks to short.
Lesson 9
Buying Mutual Funds
Opening: You have $10,000 to invest and you want to buy a mutual fund that has
averaged a 10% return every year for the past 10 years.
How much money would you make, if you invested $10,000 in this mutual fund and it
returned 10% for the year?
How much would you make, if the mutual fund return dropped to 4% for the year?
How much would you lose, if the mutual fund had a loss of 18% for the year?
Ask your students, if they think all of these returns and losses are possible.
“What is a mutual fund and why would your team invest in one?”
A mutual fund is a basket of stocks traded by a professional or a team of professional
stock traders. A well-chosen mutual fund brings automatic diversification, the potential for
a strong return and sound professional management for your team’s portfolio.
Even though a mutual fund has done well for 10 years doesn’t mean that it will continue to
do well in one specific year. Many things could happen. The market could have a bad
year, hurting the returns of all funds. The fund itself could be under new management.
This means that the person picking the stocks in the previous good 10 years could have
changed jobs or retired, and the new professional is not as strong a stock picker.
Your teams need to consider the following items when selecting mutual funds for their
portfolios:
1. The funds ranking: 5 star funds are usually the best and 1 star funds are to be
avoided. Select funds with a 4 or 5 star ranking.
2. Look for high average returns over 3-5 years. If you can find a fund that has
returned 12% or better and has 4-5 star rating, you have found a good fund.
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3. Avoid a fund that charges a load (fee) to join. Many load funds charge up to 6%
load to buy their fund. This expense is hard to recover. The fund would have to gain 18%
in the first year just to keep up with a no-load (fee) fund earning 12%.
4. Finally, your teams should be aware that they will pay a management fee to the
mutual fund to manage their money. An average management fee on domestic mutual
funds is between 0.7 - 1.2%. Mutual funds that invest in foreign stocks should charge in
the range of 1.0 - 1.5 %. This fee is paid no matter how your mutual fund does and will be
assessed each year.
Items 2-4 can be developed into separate math problems for your students to explore
during math time.
Computer Explore: Take your students on a tour of the Yahoo Finance mutual funds
section. On the finance page, click on “Top Funds.” You can then show the “Top
Performers” in diversified categories and the overall “Top Performers.”
This is a good time to reinforce the idea that their portfolios should be diversified by
industry. Explain that a mutual fund makes it easier to diversify within the US by industry.
Mutual funds also allow for diversification into overseas markets. Show them all the
categories within the US and overseas mutual funds for industry and market diversification.
Next pick a fund and demonstrate where the 3-month, 1-year, 3-year and 5-year returns
are listed. See if the students notice how there are different top funds in the 3-month
period and the 5-year period. Explain to the students that if they were investing their own
money that they would want to take a long-range view and pick funds that had a good rate
of return over the last 5 to 10 years. However, in the SMG they are only investing for 15
weeks. Thus, they should probably pick mutual funds that are doing very well right now
and pick from the top funds in the 3-month period.
Pick a fund to look at and show them all the information on that page. The students should
record the price, the fund’s ticker symbol, the number of stars, the fund’s year to date
return, and the fund’s expense ratio.
Click “Performance” on the sidebar and show the students how to track the fund’s quarterly
performance. On this page, it will also tell you if the fund is a no-load or load fund.
Assign US and overseas market researchers within each team. Divide up key domestic
categories to avoid duplication as well. Have students work in pairs and record at least 5
mutual funds to bring to the group to discuss as possible investments.
Summary: Gather investment teams to discuss their findings. Have students pick 5 - 10
funds overall to purchase and recommend that they use their remaining $50,000 to buy
mutual funds. Have your students purchase their funds with your oversight.
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Lesson 10
When to Sell a Stock or a Mutual Fund
Note: This lesson should be taught before students start investing so they are
ready to sell losers at a 5% loss. This lesson should be revisited every time
students work on their active portfolio to keep their portfolios protected. As in real
life, small losses are easier to recover from than large losses in the SMG.
Opening: “One of your stocks has fallen in price, when do you sell?” You could sell
immediately or you could wait and hope it goes back up in price.
Many investors set a limit on losses. For the purpose of the SMG, a stock that drops by
more than 5% should be sold. This barrier will keep you from compounding mistakes.
Would you rather have a 5% or 20% loss in a stock? If you sell with a 5% loss, you will
keep more of your money for a better investment. If you own a stock that drops 5% or
more, do not buy more shares. By buying more shares, you may just compound your
initial mistake.
Students and investors can apply this 5% loss rule to stocks and mutual funds. It is always
better to keep your losses small. The 5% rule is also a way to keep investors from getting
emotionally attached to a losing investment.
The second time to sell a stock is when it has reached its target price. A target price is
when a stock reaches a price that the investor expected. You can find target prices on the
Yahoo stock summary page. Students can use these target prices as a guide. When a
stock reaches this price it should be sold.
Investment Tool Number 3: Students should include the target price as their third
investment tool. A stock’s target price should be included in the team’s analysis for
choosing new stocks to buy. A target price of 20-40% above a stock’s current price,
means the stock has a chance to grow and make money.
Another source for target prices is on MSN. Show students the “Investment Wizard” on
the MSN financial site. On page three of the “Investment Wizard,” is the 2006 and 2007
target prices for any stock with earnings. If the stock does not have earnings a future
stock price is not predicted.
Examine Google on the Yahoo financial cite and your students will see a 2006 target price
for Google at $476 per share. On the MSN Investment Wizard, your students will see a
2006 target price on for Google at $629 per share.
Ask students: “Why do you think there are different target prices for Google stock?”
Explain to your students that these valuations are based on different future earnings
projections. Yahoo and MSN are looking at projected earnings from different stock
analysts. The future earnings used for Yahoo are lower than the earnings used by the
analysts for MSN.
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Students should understand that stock targets are based on predictions and stocks may
not meet these predictions. Students should pick stocks with steady and strong earnings
growth of 10 to 15% per year for long term investing. A very fast grower like Google can
have wide price changes in its stock when earnings start slowing down.
Computer Explore: Have teams check their current SMG portfolios for losers. If a stock
has fallen by 5% or more it should be sold. Next teams can examine the target price for
stocks in their portfolios and record them. They should look for target prices on Yahoo and
the MSN Investment Wizard.
Summary: Have students gather in teams and discuss the difference between their
stocks current price and the target prices. If some stocks are near or above the near term
target prices, the teams may want to consider selling those stocks. Those stocks that are
not close to their target price should be held for future price appreciation.
Homework: Have your students look for more stocks that are good growers based on
Investing Tools 1 and 2 found in lesson 4 and 5. Then have your students make sure their
stocks have a higher target price. Your students should find 3 stocks that fit these criteria
to bring to their team discussions.
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