The Stock Market: Risks & Rewards
- The stock market is important in the operation of the American economic system. Companies sell stock to raise funds for improvements and expansions.
- The stock market also plays a critical role in personal financial planning. Not only do many individuals directly purchase shares of stock as part of their personal financial strategies, most Americans have a large stake in the stock market through their retirement programs. Investments in common stocks have proven to be an excellent long-run strategy in retirement planning, compared to alternatives such as savings accounts, government securities, corporate bonds, precious metals, works of art, rare coins, and stamps, and even baseball cards.
- The stock market dramatically illustrates how prices are (almost instantaneously) determined through the interaction of supply and demand in an auction-like environment.
- Finally, people of all ages find the stock market interesting. In both fact and fiction, fascinating stories of winning and losing vast fortunes in the stock market abound. Economics teachers can capitalize on the natural interest in the market by integrating lessons dealing with the stock market in various parts of their courses. Start by teaching students to read stock price reports and interpret financial information.
Economic institutions and incentives
Markets and prices
- Several kinds of specialized institutions are found in market economies – the stock market is one such institution.
- Prices for corporate stocks are largely determined by people's beliefs about a company's future earnings or profits.
- Profit is the difference between revenues and the costs of producing or selling a good/service. Profit is a return for risk taking.
- The hope of earning profit motivates businesses to risk producing goods and services for the market.
- Read and interpret stock market price reports.
- Define profits and explain the role of profits in the American economic system for both firms and individual investors.
If your class is not working online, print hard copies of Activity 1 and 2 for each student.
Activity 2 will require -
- at least 1 dart
- backing that can be used as a dartboard (bulletin board, cork tiles, Styrofoam panels, etc.)
- a list of stock prices
Log on to How To Read Stock Market Pages or distribute hard copies to each student and discuss the Activity with the class. The explanations are straightforward and generally easy to understand. Point out that the price-earnings ratio is the most useful measure in illustrating basic economic concepts because stockholders are buying claim to the company's future profits.
The price of a share of stock, like the price of other things, is determined by the supply and demand i.e., by buyers and sellers. Stress that a stock with a low P-E ratio is not necessarily a "better" investment than one with a high ratio because the stock price is based on expected future prices and earnings.
Log on to A Random Walk Down Wall Street or distribute hard copies to all students. Ask them to read the sheet. Then set up the dartboard and "select" three stocks by throwing a dart. Then ask three students to contact a broker or bring in choices made by "experts" from other sources. Track the stock prices for three to six weeks.
Be prepared for a wide range of possible results: sometimes the expert opinions will beat the dart, and sometimes the dart will win decisively. Explain that the real test is to beat the random choice methods for a large number of stocks over months or even years.
Set some additional ground rules for the Activity. For example, you may want to restrict the choices to common stock. If a dart hits any security other than a common stock, you could either choose the common stock nearest to the dart or re-throw the dart. Students throwing the darts might also be blindfolded to emphasize the randomness of the selection process.