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Lesson 5
Lesson Topic: Stocks and the stock market: What are they and how do they work?
Goal: To go into greater detail about stocks and the stock market. Have students understand the way stocks are valued and the different things that affect stock price. Students will use this information to learn the math around calculating investment value and company market capitalization.
Lesson Overview:
1. Class discussion – What do they know about stocks and the stock market?
2. Lecture/Background info – What are stocks? What is the stock market?
3. Video – Middle School Money Matters Video 8-5 : Introduction to stocks and the stock market
4. Math lesson – How to use stock prices to calculate company value (Market Capitalization) and investment value.
5. Student work – calculating investment values using stock prices
6. Wrap-up or Extension activity
Class Discussion Questions: We learned a little last lesson about investing. One type of investment we discussed was stocks. What are stocks? (They are a fractional ownership in a company). How are stocks ‘Created’? Any ideas? What do you think? Where and how can a person buy stocks? Why would you want to buy stocks? What are the risks to owning stocks?
The teacher could even pose these questions to the class and have them research online the answers and then share with the class as this is a complicated topic and students at this age may have limited background knowledge.
Background Information
Stocks are essentially a fractional ownership of a company. They can be private – a small company may have a few owners who all own different percentages of a business, or public, like companies that are listed on a ‘stock exchange like Canada’s largest stock exchange, The Toronto Stock Exchange or TSX. Stock exchanges were generally created as a means for businesses to raise money for expansion during the industrial revolution. While the New York stock exchange was created in the early 1800s, the Toronto Stock exchange in Canada did not debut until 1861. The exchanges allowed people to buy shares in a company in the hope that the company would do well and then pay out profit to the shareholders. The stock markets have seen many ups and downs over the years, famously the crash of 1929 which led into the depression years in the 1930s, and most recently the sub-prime mortgage fiasco in the United States which led to the crash of 2008. The average person may not think fluctuations in the stock market really affects them, but many Canadians have their retirement savings invested in mutual funds which are collections of stocks on the stock market. Pension funds also invest heavily in the stock market. One big fallacy you often hear is people equating the performance of the stock market with the economy of a country. While it is true they can be linked, they are not the same thing. Just because the stock market goes down, does not mean the economy is necessarily suffering.
Lesson - Company and investment valuation based on stock prices
Companies become ‘listed’ on the stock exchange as a way to raise capital (money) to expand their business. It is a complex process, but once a company gets approval from the securities regulators it can sell or issue securities (shares) and use that cash to fund business expansion. Having shares publically available and traded also gives a valuation to the company as a whole. If a company has 100 shares and each share is worth $100 then the value of the company is:
The number of outstanding shares 100 x the share price $100 = $10,000
Most companies listed on the stock exchange have millions of shares in circulation but keep specific tabs on who owns them. If the company makes a profit, it may decide to pay out some of that profit to the share owners. The payout of company profits to shareholders is called ‘Dividends’. If a company looks like it will do well and sales and profit will increase in the future, then demand for that company’s shares may increase and drive up the price. Perhaps you bought shares in a company when it first started and you paid $10 per share, if demand for those shares increases, the price to buy them may go up to $15, meaning if you now sold the shares, you would earn an extra $5 per share, as mentioned above, this is called a capital gain.
Videos:
These videos give a good basic introduction to stocks and the stock exchanges. Then students can watch the MSMM video:
MSMM Video 8-5: Company and investment valuation using stock prices.
Class work: Calculating investment value
Using the supplied informational worksheet, go through a lesson on how to multiply out number of shares x share price in order to determine either investment value or company valuation (process is explained on worksheet), have students use a calculator to calculate the value of an investment based on number of shares owned and current share price. Do the questions on page 2 of the worksheet.
Example: If a person owns 50 shares of company X and the shares are trading at 10$ per share, the value of that investment is:
Number of shares x share price = Investment value
50 x $10 = $500
Online Activity: Have students go online and look up the stock prices of some of the companies they have heard of. See if they can find any charts of historical stock prices for those companies. Can they find any companies where the share price had drastically increased or decreased in a short amount of time? Have them do some online research to see if they can find out why these dramatic price changes happened and share out with the class.
Wrap-up / Extension
Look up the history of the stock market, the crash of 1929, 2008, and others, what caused these crashes? How has the stock market changed over the years? Have students share out with the class what they discovered.
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