Stock Market Game Sample Lesson Plan: Stock Market Game Sample Lesson Plan Prepared By
Sara Tonks, B.sc, MBA Stock Market Game: Stock Market Game Objective:
To help get a better understanding of stock markets, how they work, what factors influence them, and their volatile nature. As well, students will learn some rudimentary, but important, approaches to picking stocks for an investment portfolio.
Note: many of the concepts presented in this lesson plan can be further expanded into future lessons. Stock Market Game: Stock Market Game Teachers Preparation:
Go to statistics Canada website and in a table record the values of some of the common leading, coincident and lagging indicators (noted below) over a number of periods.
Have students bring in the stock listings section of the newspaper (Globe and Mail). Or alternatively, copy a section of the listing, including the section of “How to read stock listings”.
visit Investopedia to get definitions of common investing terms.
Stock Market Game: Stock Market Game Teachers Notes:
Start the lesson with some interesting stories about stocks and the stock market, such as some of the big scandals and some of the big winners (Scandals: BreX, Enron, Worldcom. Winners: Microsoft, …) Stock Market Game: Stock Market Game What is a stock?
Stock is ownership of a company. When you purchase stock or shares of a company your are becoming a part-owner of it. As owners of the company, shareholders are entitled to the earnings of the firm. Stock Market Game: Stock Market Game What is a stock continued…
Some profitable companies pay out some or all of these earning to shareholders as dividends, while other firms will re-invest the earnings to grow the company. The underlying assumption being the shareholder will enjoy greater earnings in the future if the company grows.
Stock Market Game: Stock Market Game Continued…
Investors will pick shares in companies that are profitable (and are expected to stay profitable) or in companies that are expected to become profitable. Stock Market Game: Stock Market Game Possible Discussion
What makes a company profitable?
Name some companies that have good products (or popular products) and probable have good sales?
If you wanted to own any of these companies, which would you choose (top three ranking, for example)?
Stock Market Game: Stock Market Game Factors affecting stock prices:
Now start to examine some factors that can affect stock price. This will lead to a discussion of the categories of stocks (Cyclical, or defensive), the business or economic cycle, and diversification. Stock Market Game: Stock Market Game Discussion
What are some possible factors that affect the product sales of a firm?
Product is a fad - in style or out of style(examples..)
Product is poor/good quality (Example: class action suite against Maytag on faulty front load washer; Mercedes Benz)
People can no longer afford to buy the product. Stock Market Game: Stock Market Game Continued…
With the last point lead a discussion on what types of products and services are not bought when people have less money to spend. Stock Market Game – Activity One: Stock Market Game – Activity One Activity One
Have students work in groups and list 5 products they would no longer purchase if their household income was drastically cut, and 5 products they would continue to buy. Stock Market Game: Stock Market Game From this activity lead a discussion on what are cyclical stocks and what are defensive stocks. Cyclical stocks prices move with the business cycle; increase during boom-times, and decrease during slow-downs or recessions. Defensive stocks tend not to fluctuate significantly as a result of changes in business cycle. Stock Market Game: Stock Market Game Continued
Examples of firms with cyclical stocks are those in the automotive, airline, travel, entertainment, and fashion industries. Examples of firms with defensive stocks are utility firms, those that sell consumable products (food, and personal hygiene products for example).
Stock Market Game: Stock Market Game Economic indicators or businesscycle indicators
Stock market investors, engaged in active trading (or investing) closely watch economic or business cycle indicators in an attempt to predict economic changes that will affect the stock markets. These investors will move their money to minimize losses and maximize profits. Stock Market Game: Stock Market Game Continued...
Generally the business cycle indicators are grouped into three categories: Leading Indicators, Coincident Indicators, and Lagging Indicators.
Stock Market Game: Stock Market Game Continued...
Leading indicators tend to peak before the entire economy. The most important leading indicators include: housing starts, manufacturers’ new orders (especially for durables), spot commodity prices, and money flows. Statistics Canada combines a series of ten leading indicators into a single index – the Composite Leading Indicator. Stock Market Game: Stock Market Game Continued...
Coincident indicators change at approximately the same time and in the same direction as the economy. These indicators include GDP, industrial production, personal income, and retail sales.
Lagging indicators tend to change after the economy has changed. The most common ones are private sector plant and equipment spending, unemployment rate, labour costs, levels of inventories, and inflation. Stock Market Game – Activity Two: Stock Market Game – Activity Two Activity Two
Give to the students the indicator data you have collected, have them use that data to suggest the stage of the business cycle. Group work is suggested followed by class discussion. Stock Market Game: Stock Market Game Why invest in the stock market?
Investors typically can earn more money buying stocks than they can by having the money sit in a savings account at the bank. Why? At this point introduce the notion of Risk and Reward, or risk and return. Stock Market Game : Stock Market Game Continued…
Explain there are two ways investors make money from purchasing stocks: capital gains, and income.
Show calculations for capital gain, and dividend yield, and return on investment. Stock Market Game Lesson Plan #1 Stock Market Game: Stock Market Game Main investment objectives of the typical investor:
Preservation of capital, income, and capital growth. (Explain what these terms mean) Stock Market Game: Stock Market Game Diversification
“Don’t put all your eggs in one basket” In general terms explain the theory behind portfolio diversification and support it with a simple exercise: Sample Exercise: Sample Exercise Exercise:
Bill invested $100,000 in stocks. He bought:
500 shares of Winbig Corporation at $100 a share and
500 shares of Cheeseball Corporation at $50 a share and
15,000 shares of Flybynite Corporation for $5 a share. Sample Exercise: Sample Exercise Exercise Continued…
Brandon also invested $100,000 in stocks. He bought:
500 shares of Bigbank Corporation at $100 a share
100 shares of Winbig Corporation at $100 a share
200 shares of Oldsteady Corporation at $50 a share
200 share of Oilman Corporation at $50 a share
4000 shares of Flybynite Corporation for $5 a share.
Sample Exercise: Sample Exercise Exercise Continued….
After a year the stock prices per share were?
Flybynite $0 Sample Exercise: Sample Exercise Exercise Continued…
Calculate the value of Bill’s and Brandon’s stock portfolios? Stock Market Game – Activity Three: Stock Market Game – Activity Three Activity Three…
Pick some stocks and ask the students to record the price…. as shown on the stock market listing. Picking stocks: Picking stocks Looking at the financial health of a company
The financial statements of firms are usually available to see from the firm’s website. Another place to find concise and comparative financial information about public companies is the Globe and Mail’s Report on Business website. Picking stocks continued…: Picking stocks continued…
When trying to establish the financial health of a firm there are key ratios to consider. They are grouped as liquidity, debt (or leverage), profitability, and value ratios. Some of the common ratios are: Ratio analysis: Ratio analysis Liquidity:
Working capital ratio = current assets/current liabilities
Quick ratio = (current assets – inventories)/current liabilities Ratio analysis: Ratio analysis Debt:
Debt/Equity = Total outstanding debt (short + long term)/book value of shareholders equity
Interest coverage = (net earnings – equity income + minority interest of subsidiaries + all income taxes + total interest charges)/interest charges
Asset Coverage = Total assets – deferred charges – intangible assets – (current liabilities less (short term debt + current portion of long term debt))/(total debt/$1000) Ratio analysis: Ratio analysis Profitability:
Gross margin = net sales – cost of goods sold/net sales
Net profit margin = net earnings – equity income + minority interest of subsidiaries/net sales
Net return on invested capital = net earnings + total interest charges(after tax)/invested capital
Inventory turnover = cost of goods sold/inventory
In days = 365/inventory turnover Ratio analysis: Ratio analysis Value
Earnings per common share = Net earnings – preferred dividends/number if common shares outstanding
Price Earnings ratio = current market price of common share/earnings per share
Dividend yield = (indicated annual dividend per share/current market price per share) x 100. Picking stocks continued…: Picking stocks continued… When looking at ratios compare ratios of same company over time, to look for trends and compare the ratios of one company to those of competing companies in the same industry Things to consider…: Things to consider…
52 week high/low compared to yesterdays closing – if significantly different, why?
Volume of trades – high/low, why?
Yield Things to consider continued…: Things to consider continued… PE ratio (explain what it is and how it is used) – PE ratio is stock price divided by most recent earnings data of the company. The ratio is one way to easily compare one stock with another (presumable from the same industry). A low PE can indicate a stable and mature company (the price of the stock reflects the earnings expected), where as a high PE is more likely an indication of an emerging or expected growth company (the price of the stock reflects the markets expectation of good future earnings). Things to consider continued…: Things to consider continued…
Key ratios (is the company profitable, is there value in the investment, is the leverage high or low, is the liquidity high or low compared to other companies in the same industry)
Economic indicators – what stage is the business cycle
What is the relationship of the firm with the business cycle (cyclical or defensive) Things to consider continued…: Things to consider continued… What are your investment objectives? Looking for growth (capital gain), income (dividends), willing to bear more risk for greater return, or need to preserve capital and therefore minimize risk. Things to consider continued…: Things to consider continued… The balanced portfolio includes the investments from three major classes: cash and cash equivalents; fixed income securities (bonds and preferred shares); and common shares. The proportion of each type of investment in the portfolio will be determined by the investment objectives of its owner. Stock Market Game – Activity Four: Stock Market Game – Activity Four Activity Four
Taking the above factors into consideration, have the students pick a portfolio of stocks from those listed on the SMG site in preparation to play the stock market game.