INTRODUCTION

pigSara had the good fortune to have a generous grandparent who gave her $1,000. The grandparent told Sara to invest the money over a five year period and use the earnings to pay for her future college expenses.

Sara is aware of several investment alternatives, but she is interested in learning more about the risks and rewards of the stock market. Before investing her money in stocks, Sara needs to learn more about the risks and rewards involved.

It is impossible to predict the future, but a look into the past can give you the insight you need to make better decisions. This lesson asks you to look at the historical pricing of selected stocks to give you an idea of how your investment may work for you. By going back five years in pricing history, the lesson reinforces the importance of being a long term investor. You are asked to buy a stock at its price of five years ago and plot its progress up to its selling point today. It is relatively easy to recognize the change in the stock's price over time. Remember there are other factors that deplete returns. You will learn that the actual return is reduced by inflation, transaction costs, and taxes. It is similar to your take-home-pay not being what you had hoped it would be.

The Dow 30 (Dow Jones Industrial Average) is the most widely recognized stock market indicator in the United States. It includes only 30 stocks, all listed on the New York Stock Exchange (NYSE). These are blue chip companies that reflect the health of the U.S. economy.

TASK

In this lesson you will identify quality growth companies found in the Dow Jones "30", and demonstrate understanding of how to chart or graph historical pricing of companies over a five-year period. You will also demonstrate factors which tend to reduce the gains your investment made, and calculate real and nominal returns on investment.

PROCESS

To accomplish this task you will go through the following process.

1) Select a Dow Jones 30 stock.

Dow Jones 30

Once a you select a stock, it is important that you have the symbol for that stock.

Stock Symbol Lookup

2) You then need to use the Internet site below to chart the price history of the company you selected over the past five years. Visit

Historical Quotes : Where you will find historical price quotes.

When you open the stock history table, it is important that you use the column labeled "Adjusted Close." This will adjust the price for dividends and splits.

3) Finally, you will use the information from the price history to fill out the nominal and real total return handout, and write a summary comparison of the results.

Whats a Dollar Worth : For a better understanding of the impact of inflation on an investment.

CONCLUSION

Investing decisions are difficult to make by looking at only one alternative. This activity does give you some insight as to possible returns from investing the stock market. Keep in mind that the risk-reward dynamic is a little more volatile in the stock market than it is in other alternatives. This would be a good time to compare stock market investments to other alternatives. (Savings Accounts, Certificates of Deposit, Mutual Funds, etc.)

ASSESSMENT ACTIVITY

Evaluation of this activity will be from:

  • The table students completed for figuring nominal and real returns.
  • The summary or comparison made between the two.
  • Group discussion following completion of the table.

EXTENSION ACTIVITY

To become more familiar with the world of investing in the stock market, visit the following websites.