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About this lesson
 grade level: 6-8, 9-12
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curriculum standards:
10 12
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author: Patricia Bonner
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posted on: April 14, 2005
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Take a Risk on Investor Island (Part 1)

Key Economic Concepts:

Description:

Although many people use the words saving and investing interchangeably, they have different meanings. To save money is to put money aside for use in the future. Investing is using one's money to try to make more money. Students take a trip to Investor Island on the imaginary Planet Orange where they are introduced to the concepts of investment, risk, and return. With residents of the islands, they explore stocks and bonds as investment options. In learning about these two investment options, they discover there is a trade-off between risk and return.

Lesson Objectives:

Students will:

  • Explain risk, return and the trade-off between them
  • Use historical performance data to predict a stock's risk and potential return
  • Calculate stock profit and loss
  • Identify key differences between stocks and bonds

Introduction:

Part 1
Part 2

Write the word "save" on the board. Ask students:

  • What does it mean to save money? [Saving is setting aside money for use in the future.]

Write the word "invest" on the board. Tell students the words "saving" and "investing" money are often used interchangeably but they are actually different. Ask students:

  • What do you think it means to invest your money? [Investing is using one's money to try to make more money]

grabbing for moneyExplain that people save for emergencies and for making specific purchases in the near future (usually three years or less). We put our savings in a savings account or other place where it will be safe and earn a reasonable rate of interest that keeps up with inflation.

NOTE: If students are not familiar with the terms interest and inflation. Explain that "interest" is paid by a borrower to a lender for the privilege of borrowing the lender's money. "Inflation" occurs when prices increase over time.

Investing, on the other hand, focuses on using one's money to make more money, and achieving long-term financial goals. With investing, there is no guarantee an investor will make money. In some cases, an investor may even lose the money invested. Investing should be considered only after a person has adequate savings.

Tell students they are going to explore investing by traveling to Investor Island on an imaginary Planet Orange. Have them print the THINK ABOUT IT worksheet. Direct them to follow the instructions throughout the lesson and be prepared to answer the THINK ABOUT IT questions.

  • Have students answer the Introduction: THINK ABOUT IT questions.
  1. How did Donia hope to get a profit on her investment? [Catching orangefish]
  2. How much money did Donia invest? [$5 for worms]
  3. What else did she invest? [Her time]
  4. What is a profit? [A profit is the amount of money you make when you sell something for more than you originally paid to buy or create it.]
  5. How much did Donia profit? [$45]

Resources:

Investor Island
www.orangekids.com/amy/invest_ip_001.htm [11] .
Students make several trips to Investor Island throughout this lesson. The Island is part of the hypothetical Planet Orange developed as an interactive educational experience for students in grades 6-8. Source: ING Direct

Worksheet -THINK ABOUT IT
The THINK ABOUT IT worksheet has questions for students to answer throughout the lesson that will help reinforce key concepts.

Worksheet - The Rise and Fall of Stock.
www.orangekids.com/pdf/po_worksheet_inv004.pdf [6]
Students study the past performance on three Planet Orange securities then assess their risk in Activity 2.

Worksheet - Risky Business
www.orangekids.com/pdf/po_worksheet_inv002.pdf [8]
Students calculate the rise and fall in the stock price of Vitapede on Planet Orange.

Process:

broke man

Throughout this lesson, students are asked to think about what they have just read. When students have completed their work on the computer, test their understanding by discussing these questions and their answers.

 


Activity 1: Risk and Return

Students are introduced to investment return and its two forms: 1) income and 2) growth. They learn there is no guarantee there will be a return on an investment. In some cases, even the money invested can be lost. Risk refers to the possibility an investor will lose money invested and not receive an expected return. Students visit Risk Lagoon www.orangekids.com/amy/invest_ip_002.htm [1] on Planet Orange to learn more about investment risk.

  • Have students answer the Risk and Retrn: THINK ABOUT IT questions.
  1. Why do you think the fishing spot on Planet Orange was called Risk Lagoon? [The chance of catching a huge Orangefish was small]
  2. How would you describe the potential return on Risk Lagoon - high or low? [The potential return is high but there is NO GUARANTEE there will be a return.]
  3. Who had a positive return on their investment at Planet Orange? [Donia and Bubba]
  4. Who do you think is better off time - and money-wise - Donia or Bubba? [Bubba earned more money on his one large Orangefish from Risk Lagoon, but it took Donia fewer days to catch her fish on Investment Pier. Donna earned $15 per day while average earnings for Bubba was just $.39]
  5. Ted not only failed to catch a fish, he lost the money he had invested! How much did Ted lose? [Ted lost the $3 he paid for worms]

Activity 2: Buy Stocks - Be an Owner

Two Planet Orange worksheets are used in this activity. Your may prefer to print these out in advance and distribute to students instead of having students print them out on their own.

Students travel to Stock Archipelago www.orangekids.com/amy/invest_sa_001.htm [2] on Planet Orange for the basics on buying stock in a company. They are instructed to visit each of these sites during their trip:

stockOn Planet Orange students learn that stockholders (also called shareholders) have a small ownership stake in a company. Follow-up text in the lesson introduces appreciation and capital gain as what occurs when a stock increases in value. Dividends are introduced as a portion of a company's profits paid to investments. It is stressed there is no guarantee a company will increase in value or pay a dividend. Students also discover that shares owned by a stockholder give investors a voice in how a corporation is run. Each share gives an investor one vote in the selection of the corporation's top managers or directors.

Students are then directed to complete two worksheets.

  1. The Rise and Fall of Stock. www.orangekids.com/pdf/po_worksheet_inv004.pdf [6] Students the past performance on three Planet Orange securities then assess their risk. It is noted that although one can never know EXACTLY how an investment will turn out, historical data can help predict what is likely to happen.

    2. For answers teachers will have to register by following this link: [www.orangekids.com/TRC_login.asp?f=home [7] ].

    Alligator B-Gone Risk Level: Mid
    Tangerine Bank CD Risk Level: Low
    Vitapede Stock Risk Level: High

    NOTE: Tangerine Bank CD is a Certificate of Deposit NOT a stock. If students are not familiar with certificates of deposit, you will need to explain a CD is a special form of savings account at a bank or credit union that requires a specific amount of money to be deposited for a specific period of time-ranging from 90 days to 10 years. CDs usually pay an interest rate higher than a regular savings account BUT there is often a penalty charged for early withdrawal of funds.

  2. Risky Business www.orangekids.com/pdf/po_worksheet_inv002.pdf [8] . Students calculate the rise and fall in the stock price of Vitapede. This worksheet is completed after students practice figuring out the profit and loss on stocks using the Orange for Thought option at Stock Swamp www.orangekids.com/cedric/invest_sa_002.htm [9] .

    For answers teachers will have to register by following this link: [www.orangekids.com/TRC_login.asp?f=home [7] ].

    Headlines

    1. Rises - $18 + $3.47 = $21.47
    2. Falls - $21.47 - $1.20 = $20.27
    3. Rises - $20.27 + $0.50 = $20.77
    4. Rises - $20.77 + $2.22 = $22.99
    5. Rises - $22.99 + $4.73 = $27.72
    6. Falls - $27.72 - $2.99 = $24.73
    7. Falls - $24.73 - $5.23 = $19.50

    3. Questions

    1. $19.50 x 4 = $78
    2. Before the last headline
    3. $24.73 x 4 = $98.92
      $98.92 - $72 = $26.92
    4. No

Activity 3: Buy Bonds - Be a Lender

bondStudents are introduced to bonds as a print IOU given a borrower (a company or government) to a lender (an investor). The risk in purchasing bonds is that the borrower may not be able to pay interest or return the money loaned at maturity. Bonds are generally considered less risky than stocks because creditors are favored over stock owners if a company fails.


Hanging out on Beach Bond www.orangekids.com/amy/invest_cv_001.htm [10] on Planet Orange, students are told the story of Darius who loans money to the federal government by purchasing a U.S. Government Bond. Darius receives interest of 6% or $60 annually for ten years.

  • Answer the Stocks & Bonds: THINK ABOUT IT questions.
  1. What are the risks involved with stocks and bonds? [Investors might not have earnings, they might also lose their investment]
  2. A trade-off exists between investment risk and return. The higher the risk, the higher the possible return to the investor. The lower the risk, the lower the possible return. In general, do you think stocks or bonds will have a higher return? [Stocks are usually considered higher risk and thus, tend to pay a higher return.]
  3. Why might a person choose a higher-risk investment over lower-risk savings options? [The investor hopes to get a higher return on their money and is willing to risk losing their money.]
  4. When is the best time to buy and sell a stock? [When the price is low and when the price is high]
  5. What are three important differences between a stocks and bonds?

    Responses may include:

    • Bonds are debt instruments; stocks are equity - representing ownership in a corporation
    • While there are exceptions, stocks tend to be higher risk than bonds.
    • As creditors, bondholders have a claim prior to stockholders on company earnings.
    • The return on bonds is usually earnings while the return on stocks may be a combination of earnings and growth.
    • Stockholders have a voice in how a corporation is run; bondholders almost never do.

Conclusion:

If you have not already done so, discuss student responses to the THINK ABOUT IT questions throughout the lesson.

Project the transparency Saving versus Investing (Saving vs. Investing) for the class to view. Remind students there is a difference between saving and investing. Savings accounts in banks and credit unions, certificates of deposit (CDs), and money market funds are the places people put money when they want their money to be safe. Because savings are used for emergencies and short-term goals, the money must be liquid. This means it is relatively easy to get the money by writing a check, going to the bank or using an Automated Teller Machine (ATM) machine. With the exception of early withdrawal on a CD, There is no penalty for withdrawing the money. The trade-off for low risk and accessibility is a low-return in the form of interest. Savers hope they will at least earn enough interest to keep up with inflation.

Investing involves greater risk than savings. There is no guarantee an investor will make money. In some cases, they may even lose the money they invested. But with the greater risk comes the potential for a higher return. Some investments - for example, stocks - offer the potential for growth as well as earnings. Because there are ups and downs of security prices (referred to as volatility) an investor has to be concerned he or she might have to sell the security when the value is down causing a loss of money. Investing should be considered only after a person has adequate savings. Investing helps people achieve mid-term and long-term goals.

Assessment Activity:

Several opportunities for student evaluation are provided throughout this lesson:

  1. The worksheet - The Rise and Fall of Stock. www.orangekids.com/pdf/po_worksheet_inv004.pdf [6]
    in Activity 2 requires students to predict risk for three securities based on past performance.
  1. The worksheet - Risky Business www.orangekids.com/pdf/po_worksheet_inv002.pdf [8]
    has students calculating the rise and fall in the price of hypothetical stocks.
  1. Responses to questions in the THINK ABOUT IT sections reflect student understanding throughout the lesson. These may be oral responses or written responses using a worksheet or journal.

The extension activities offer several additional opportunities for assessment.

Rubrics (Risk-Rubrics) are provided for assessing contribution to class discussion, worksheets, graphs, and group efforts - adjust and weight them to fit your specific needs.

Extension Activity:

Have students:

  1. Practice reading the newspaper financial pages using the Stock Scavenger Hunt www.orangekids.com/pdf/po_worksheet_inv005.pdf [12]
  2. Pick a stock to track in the Wall Street Journal or the financial
    pages of a local newspaper. Give students graph paper to chart the progress of the company they pick for a month or several months.

    Part 1
    Part 2

 

Links Used:

1. ^ "www.orangekids.com/amy/invest_ip_002.htm" - (www.orangekids.com)
2. ^ ^ "www.orangekids.com/amy/invest_sa_001.htm" - (www.orangekids.com)
3. ^ "www.orangekids.com/amy/invest_sa_002.htm" - (www.orangekids.com)
4. ^ "www.orangekids.com/amy/invest_sa_003.htm" - (www.orangekids.com)
5. ^ "www.orangekids.com/amy/invest_sa_004.htm" - (www.orangekids.com)
6. ^ ^ ^ "www.orangekids.com/pdf/po_worksheet_inv004.pdf" - (www.orangekids.com)
7. ^ ^ "www.orangekids.com/TRC_login.asp?f=home" - (www.orangekids.com)
8. ^ ^ ^ "www.orangekids.com/pdf/po_worksheet_inv002.pdf" - (www.orangekids.com)
9. ^ "www.orangekids.com/cedric/invest_sa_002.htm" - (www.orangekids.com)
10. ^ "www.orangekids.com/amy/invest_cv_001.htm" - (www.orangekids.com)
11. ^ "www.orangekids.com/amy/invest_ip_001.htm" - (www.orangekids.com)
12. ^ "www.orangekids.com/pdf/po_worksheet_inv005.pdf" - (www.orangekids.com)

Teacher Reviews

October 6, 2006
This is an excellent opening to how the stock market works.
- Daniel Strickand  Richland, VA

May 5, 2007
This is a great lesson for preparing students to try their hands at virtual trading. It familiarizes them with the terms and concepts they need to know to be informed investors.
- Katherine McMillin  Yuma Catholic High School

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