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Grade 9-12

Buy and Hold: A Stock Market Simulation

Updated: January 26 2016,
Author: Martha Rush

Students will participate in a brief activity as well as direct instruction that explains the purpose of stocks and bonds from both a corporate and investor perspective. Then they will work in groups to make investment decisions in a structured stock market game set in January 2000. Students will analyze the performance of their investment portfolios over a decade and evaluate their gains and losses, calculating rates of return. Finally, they will evaluate the pros and cons of investing in stocks and bonds, looking at both risk and return.

Time Required

100 minutes. Procedures 1 to 24: 50 minutes on the first day. Procedures 25 to end: 50 minutes on the second day.

Will Be Able To

  • Define corporation, initial public offering, stock and bond.
  • Evaluate alternative stock purchases and analyze the criteria for deciding to buy or sell.
  • Explain how stock analysts use trend lines to analyze stock trends.
  • Calculate rates of return for stock and bond purchases over a 10-year period.
  • Explain why diversification can lower investment risk.
  • Explain why many investors find it difficult to follow the advice “buy low, sell high.”
  • Calculate exponential growth and decay and compare to see losses or gains. 


  • Slides 1-20. PowerPoint presentation | PDF presentation
  • Activity 1, cut into 1 ABC Stock Certificate and 1 ABC Bond.
  • Activity 2, two copies cut apart.
  • Internet access and devices for student use, one for each group of 2-4 students.
  • HANDOUT ALTERNATIVE: Activity 3, one packet for each group (teacher may want to cut and laminate for reuse).
  • HANDOUT ALTERNATIVE: Activity 4 and Activity 5, one copy for each group.
  • Appendix, for teacher use only.
  • Calculator, one per student.
  • Pens.
  • One die.

Note: students should not be allowed access to any websites except the interactive during the Day 1 procedures. Take necessary precautions to ensure that students cannot access the Internet on personal devices.

Prior to the lesson, the teacher should click the Sign Up as a Teacher button at:


This will require an email address and a password. The Teacher Dashboard will allow you to see all of the student portfolios and change the date in the interactive. The teacher should post their email address on Day 1 for student use.

Assessment Activity

Multiple Choice

  1. What is the major difference between a stock and a bond?

    1. A bond is ownership in a company, but a stock is a loan.
    2. A bond can always be resold for its face value, but a stock cannot.
    3. A stock is ownership in a company, but a bond is a loan
    4. A stock can always be resold for its face value, but a bond cannot.
  2. Assuming interest rates do not change, which of the following investments will have the highest value at the end of 10 years?

    1. $10,000 held in cash
    2. $5,000 invested in bonds paying 2% annual interest + $5,000 invested in stock with a 5% total return on investment
    3. $10,000 invested in stock with a 10% total return on investment
    4. $5,000 invested in bonds paying 5% annual interest + $5,000 invested in stock with a 3% total return on investment
  3. Aaron invested $25,000 in a portfolio of stocks and bonds in 2002. In 2012, his portfolio was valued at $35,000. What is Aaron’s annual rate of return on these investments?

    1. 2.86%
    2. 3.42%
    3. 4.0%
    4. 40.0%

Constructed Response

  1. Alice has $10,000 in her checking account, which is earning no interest. She is confident that she will not need this money in the next five years. At the end of five years, she hopes to have saved enough to buy a house.

    1. If she keeps her money in the checking account, what will happen to the value of her savings? (It will decrease because of inflation.)
    2. If she buys a five-year bond, paying 2.5% annual interest, how much money will she have at the end of five years? ($11,250)
    3. A friend has advised her to buy stock in Heavy Lemon, a relatively new cosmetic company that went public two years ago. What are two things she should know about Heavy Lemon before deciding? (The stock price, the trend in stock price, what the company makes, what is happening in the cosmetic industry.)
    4. Alice decides to buy stock in Heavy Lemon. She buys 600 shares at $15.00/share. Three years later, the stock is worth $12.00/share. What is her total return on this investment at this point? (-20%)
    5. Alice decides to hold onto her stock, and two years later it is worth $16.00/share. What is her annual rate of return? (1.3%)
    6. Alice put all of her money into one investment tool. Evaluate her strategy. (This is not a good strategy; she could have lost everything; she should have diversified and bought different stocks and some bonds.)


  1. Pose the following questions for review:

    1. How does a firm become a public corporation? (With an Initial Public Offering, by selling stocks to individuals.)
    2. What is the difference between a stock and a bond? (A stock is a share of ownership in a corporation. A bond is a loan.)
    3. What is an advantage of buying stock? (If the price goes up, you can earn a lot of money.)
    4. What is the risk of buying stock? (You can lose all of your money.)
    5. What is an advantage of buying bonds? (Fairly predictable returns.)
    6. What is the risk of buying bonds? (You might not get repaid; you will probably earn less than people who buy stocks.)
    7. Why do experts recommend diversification as a strategy? (You don’t have as much risk as just buying stock, but you can earn more than with only bonds. Also, it’s a bad idea to buy stock in just one company. If you invest all your money in just one stock and the company goes bankrupt, you lose all of your money. If you invest in multiple companies, you are less likely to have that outcome.)
    8. If you do invest in stock, what should you know about the company? (The stock price trend, what the company produces, what is happening in the industry.)
    9. Now that you have experienced a “low” and a “high” in the stock market, do you think you could tolerate the risks involved in the stock market? Explain. (Answers will vary.)
    10. Why do so many investors find it difficult to “buy low and sell high?” (Because everyone wants to sell when stocks are low for fear they will go lower, and they want to buy stocks that are high because they seem trustworthy.)
  2. Point out that buying low and selling high is the best strategy for earning a return in the stock market over time. However, it is difficult to pick a stock that is cheap today but on an upward trajectory. This is why it is important to make informed decisions when buying stocks or any other financial asset. 


Stocks and bonds are financial tools that corporations use to raise funds. They are also types of assets that individuals can buy with the goal of enhancing their personal wealth. Students are often intrigued by stocks and bonds, but they do not understand what these investment tools represent or the risks involved. Although traditional stock market games are useful for engaging students in the current market, they are too constrained by time to let students experience the impact of ups and downs in the market.

In this lesson, students will gain a deeper understanding of how stocks and bonds work. They will experience the fluctuations of the market over a decade and they will apply mathematical tools to help them analyze market trends and rates of return. 



  1. Tell students that today they are going to participate in a stock market simulation. Ask for a show of hands to see who is familiar with the stock market. (Most students have heard of the stock market.) Show Slide 1 and ask students to talk with their neighbor or group for 1-2 minutes to come up with an explanation of what happens at the stock market. Call on several groups to share their explanations. (People buy and sell stock; some people become rich; some people lose a lot of money.) Then ask a followup question: what exactly is “stock”? ( A share of ownership in a corporation)
  2. Explain to students that before they can understand stock, they need to know what a business firm is. Show Slide 2 and define a firm as an entity that buys productive resources (or raw materials) and uses them to create goods and services for sale. Explain that McDonald’s, Schwinn, Best Buy and Facebook are all firms producing food, bicycles, technology items, and social media, respectively. Ask students to name other firms they are familiar with. (Answers will vary. Most students will be aware of major clothing brands, tech firms, and restaurants.)
  3. Tell students that most firms start out small with just one or two owners. If unincorporated, these types of firms are called sole proprietorships or partnerships. You may want to name a few examples in your area, such as a family-owned restaurant (sole proprietorship) and a law firm (partnership). Explain that these types of firms find it difficult to expand because the owners don’t have a lot of money to invest and banks are unwilling to lend them large sums. In order to become larger, many firms become corporations. A firm can become a corporation by applying for a state charter to incorporate. The firm becomes a separate legal entity from its original owner, and it can raise money by issuing stock or bonds. A corporation can remain privately owned or the board of directors may choose to sell stock to the public. This process is called an “Initial Public Offering (IPO)” or “going public.”
  4. Show Slide 3 and ask students, "Have you ever heard of Buffalo Wild Wings?" (Many students will have seen or eaten at this restaurant.) Explain that in 1982, two business partners opened the first Buffalo Wild Wings restaurant. Thirteen years later, they had 35 locations. They knew they wanted to expand more, and they borrowed lots of money to open more restaurants, but that still wasn’t enough. In 2003, Buffalo Wild Wings held an Initial Public Offering, and this allowed them to expand rapidly.
  5. Show Slide 4 and explain to students that they are going to do a brief simulation of an IPO. Explain that before issuing public stock, the company’s founders will meet with an investment banker who will help prepare a lengthy document called a “prospectus,” which explains what the firm does and how it expects to perform in the future. The investment banker will also estimate the total value or “market capitalization” of the firm. The value includes any patents, trademarks, trade secrets or recipes, as well as all of the firm’s assets, such as buildings, ovens and trucks, and an estimate of future earnings. If the founders are selling all of the stock, then the number of shares for sale multiplied by the price of each share should equal the market capitalization. In many cases, the owners may choose to retain some shares and sell some. In the case of Buffalo Wild Wings, the owners decided to sell 3 million of a total of 8 million shares, expecting to sell them for about $15/share. Their estimates were fairly accurate and the stock sale earned them $47.4 million, slightly more than expected, which was used to expand.
  6. Ask students, "What do you think happens when a firm, such as Buffalo Wild Wings, sells a share of stock?" (They sell a piece of ownership in the company.) What happens when an individual buys a share of stock? (They buy a piece of ownership in the company.) Ask for 4-6 volunteers, and give each volunteer a small handful of classroom money from Activity 2. Then hold up one share of ABC Corporation common stock from Activity 1. Announce that ABC is a firm that sells popular new board games. The owners want to expand, so they are having an IPO. Offer to sell the stock in exchange for classroom play money. Exchange the paper stock certificate for money from one of the volunteers. Ask the volunteer, "What did you buy?" (A stock, part ownership in the firm.) "What is it worth?" (The student will likely say whatever dollar figure they paid for it.) Explain that the share is actually not worth a fixed amount – it is only worth whatever someone is willing to pay for it. Ask, "Does anyone else with money want to buy this share of ABC Stock?" (If not, encourage someone to offer the first student money for the share; explain that you will be collecting all of the money later.) Explain to students that this is how most stock trades work – most people buy and sell existing shares of stock in a “secondary market,” and the price is based on negotiation between the buyers and sellers, though not face-to-face. The stock price may rise or fall for a variety of reasons. For example, stock buyers may offer higher prices if the company is earning high profits, if it secures a patent on a new product, or because the economy is doing well and more investors are buying stock. Prices may fall because shareholders want to get rid of their stocks due to bad news, such as a liability lawsuit, lack of demand for the Ask students, "How can individual investors earn money in the stock market?" (By buying stock at a low price and selling it at a higher price; by earning dividends) Explain that financial investment can take many forms: saving in a bank, buying property, buying annuities that pay a fixed rate, or buying stocks and buying bonds, to name a few. Individuals make financial investments because they want to increase their wealth.
  7. Remind students that stockholders are now part owners of the corporation. Ask students, "What is one benefit of owning a company?" (Students will probably say earning money. Guide them to use the term profits.)
  8. Explain the following:

    • When a sole proprietorship earns profits, the profits go to the owner.
    • When a corporation earns profits, the board of directors may choose to reinvest the profits or to share them with the stockholders.
    • When the stockholders receive part of the profit, this is called a dividend payment. Dividends are another reason individual investors buy stock. When profits are reinvested, this may increase the company’s value and raise the stock price.
  9. Explain to students that corporations can also raise money by selling bonds. Ask students, "Who can explain what a bond is?" (A bond is a loan; students may also say that it is an investment.) Hold up the $100 ABC Corporation bond from Activity 1 and offer to sell it. Explain to students that the face value of the bond is $100 so the firm will sell it for $100. The bond pays $5, so whoever buys it would get $5 a year and their $100 back after 20 years. The firm, meanwhile, has borrowed that $100 to use. Exchange the paper bond for play money. Ask students, "What is the bond worth?" (Students will say $100, plus the $5 a year.) Explain that the bond can also be resold on a secondary market, for more or less than the original purchase price of $100. Ask, "Does anyone else with money want to buy the ABC bond?" (If not, encourage someone to offer money for the share; remind them that you will be collecting all of the money later.)
  10. Explain the following:

    • If someone buys the bond for $100, they will earn $5 a year, which is a 5% rate of return.
    • If someone buys the bond for less than $100, they will still earn $5 a year (and $100 later), and that will be more than a 5% rate of return. A buyer might hold out for a lower price if other investment options are paying more than 5%.
    • If they buy it for more than $100, they will earn less than a 5% rate of return. A buyer might be willing to pay more if other investment options are paying less than 5%.
  11. Ask students, "How can individual investors earn money in the bond market?" (By buying bonds and collecting interest, by selling bonds for a higher price, by buying bonds for a lower price and collecting a higher rate of return.)
  12. Explain that while most corporate bonds are a safe investment, there are also high-risk corporate bonds, issued by startup firms, that are less safe. Less than 1% of the time, corporations fail to repay their bondholders. Collect the money before moving on to step 13.
  13. Pose the following questions for review:

    1. Why do corporations sell stocks and bonds? (To be able to raise money to expand.)
    2. What is the process of selling stock to the public called? (An Initial Public Offering.)
    3. Who sets the price of a share of stock? (The market interaction of buyers and sellers.)
    4. Why do individuals buy stock in corporations? (because they hope the price will go up, and because they can earn dividends)
    5. What happens if the price of a stock goes down? (The individual buyer will lose value and possibly lose money.)
    6. Why do individuals buy bonds from corporations? (They earn interest and may be able to resell the bonds for a higher price.)
    7. Which type of investment seems more risky – a stock purchase or a bond purchase? (A stock purchase, because at least with a bond they will earn interest and a fixed sum if they hold it until maturity; a stock can lose all of its value, but that rarely happens to bonds. If a company goes bankrupt, the bondholders are paid off first and the stockholders last.)
  14. Show Slide 5 and explain to students that investing in the stock market can be very risky. McClatchy Co. is a firm that owned a large chain of newspapers. Explain that in a period of 15 years, its stock price had gone up more than 400%. Many individuals owned McClatchy stock and thought it was a safe investment. In 2005, as the Internet began to replace newspapers for both advertisers and news readers, the stock price began to fall.
  15. Remove the white text box covering part of the graph and show what happened to McClatchy stock. It bottomed out at 40 cents/share in 2009. Ask students: How would you feel if you had bought McClatchy stock for $70/share? (Very upset, worried, broke.) On the board, calculate the percent loss. Percent change = [(.40 – 70) / 70] x 100 = -99.43
  16. Explain that many expected the company to go out of business, but as of 2015 it is still in business. Explain that when a company does go out of business, its bond holders are repaid first. Stockholders receive money only if there is any left after repaying all of the debt owed to the bond holders – one more reason why bonds are safer than stocks.
  17. Make sure students have all electronic devices turned off and stowed. Show Slide 6 and explain that they are going to participate in a stock market simulation, but that it will be different from other “Stock Market games” because you are going to emphasize the long-term nature of buying and investing. A typical game lasts a semester or perhaps a year. This game will begin in January 2000, so it could last 1 year, 2 years, 5 years, 10 years, 15 years or even more. Students will not know in advance when the game will end.
  18. Explain the rules:

    • You will form a team of 2-4.
    • Your team has $100,000 to invest.
    • Your team is not required to invest all of the money, but you will have only one opportunity to invest (in 2000). You will have no opportunity to sell.
    • You may purchase a maximum of 500 shares of any specific company’s stock, and you may purchase a maximum of 500 bonds.
    • Your team will have access to stock charts and basic information about each of the available companies.
    • You may not access any unauthorized websites during this activity or you will be immediately disqualified.
  19. Show Slide 7 and explain that this is similar to the information they will receive about each company. Ask students if they are familiar with scatter plot graphs and trend lines. (Answers will vary.) Explain that in math and statistics, a trend line can be drawn on a graph with scattered data points, like this one, to reveal a general directional trend. Show Slide 8, with an approximate trend line. A trend line or line of best fit should be drawn so that an approximately equal number of data points are above and below the line. Trend lines help researchers determine underlying trends, even when data points are scattered. Explain that in higher levels of mathematical analysis, a formula can be used to derive a precise trend line.
  20. Show Slide 9 and explain that stock traders use slightly different trend lines, which students can use in their stock analysis. A stock trader will draw two trend lines. The top line, called a resistance line, joins the highest highs. The lower line, called a support line, joins the lowest lows. The trend is for the stock to trade in between these highs and lows. Traders often look at trends in one year or a few months, but some study trends on a weekly or even daily basis. The more points on either line, the stronger the trend is considered to be. This example shows a weak resistance line with only two points but a strong support line. Many traders believe that if the support line has many points showing an upward slope, the stock is a good buy. However, they buy as close to the support line as possible. In other words, they see an upward trend, but buy when the price dips. Ask students when this stock was a good buy (1990-95) Is it a good buy now? (Hard to tell; looks like it may be headed down, but the long-term trend is up.) Similarly, if the support line shows a downward trend, a trader would look to sell at the next temporary high. Encourage students to use trend lines as part of their analysis.

    **If you are using the HANDOUT ALTERNATIVE, skip to the HANDOUT ALTERNATIVE INSTRUCTIONS after Step 24.

  21. Show Slide 10 and explain that this is what the graphs in the “Research” section of the interactive will look like, although the resistance and support lines have been added for demonstration purposes. Explain that the red and blue lines are “moving averages.” The blue line (MA50) is a moving average of the price over a 50-day period, while the red line (MA200) is a moving average of the prices over a 200-day period. These lines smooth out the highs and lows. The red line puts less emphasis on the most recent changes and is meant to be a more accurate reflection of the longer-run trend in prices. Students may also use these lines to help them decide which stocks to select.
  22. Ask students to move into groups of 2-4 students, and distribute one Internet-ready device and multiple calculators to each group. Ensure that any other Internet-accessible devices are stowed. Show Slide 11 and ask students to connect to the Buy and Hold interactive at https://buyhold.herokuapp.com/ . Tell students to put in one student’s name to represent their group and type in the teacher’s email address. Their name should show up on your Teacher Dashboard.
  23. Show Slide 12 and draw students’ attention to the “Research” button, which will bring them to a page with graphs and basic information on all of the companies. Also draw students’ attention to the selection box where they can choose a stock, then choose a quantity and click “Invest” to purchase the stock. Remind students they are limited to 500 shares of any one stock. They will buy the stock only in January 2000 and they will not have the opportunity to sell, although they will track which stocks they would sell or buy later if they were able to.
  24. Show Slide 13, which shows what the students’ portfolio page will look like after they have purchased a stock. They will have the opportunity to delete the stock by clicking “Destroy” if they change their minds. If they choose to buy more of a stock, they must delete the existing purchase and buy the larger amount. They will not be permitted to buy the same stock twice. They will also not be permitted to spend more than $100,000. Instruct students to make their selections and click “Submit” when they are done. Once a student clicks submit, they may not make any changes. The teacher, however, can undo submissions by clicking on the “yes” button in the “Submitted” column on the teacher dashboard. In addition, the teacher can submit for students if they fail to do so. You may wish to have students print their portfolios and turn them in. Students must make all of their selections and submit before the end of Day 1.


  1. Skip Slides 10-13. Instead, show Slide 14, which shows the Activity 4 portfolio sheet where students will record their stock purchases.
  2. Pass out Activity 3 and Activity 4, one copy per group, and calculators and pens, as needed. Remind students that they may select as many different stocks as they wish and they may purchase up to 500 shares of each, but they cannot spend more than $100,000. (Some groups may need an additional copy of Activity 4.) Tell students they are to fill in only Columns 1-4, as shown on Slide 14. They should keep a running total to make sure they do not spend more than their allotted $100,000. At the bottom of the page, each group should also note how much they will spend on bonds and how much they will retain as cash. The teacher should circulate the room during this activity to check that students understand the procedure.
  3. Collect the Activity 4 Transaction Records from each group at the close of class. Before Day 2, check to make sure that each group has recorded its stock purchases in penand accurately calculated totals. If not, allow time at the beginning of Day 2 for corrections.


  1. Begin Day 2 by asking students to return to their groups and log in to the interactive again. The teacher may need to provide access codes if students have forgotten them. These are available on the Teacher Dashboard. If students are using the handout alternative, the teacher should redistribute portfolios. Pose the following questions:

    1. Which stocks did you buy? (Answers will vary. Some students will buy stock in corporations they know, such as Pepsico, while others will look for tech stocks; some will look for cheap stocks.)
    2. Why did you choose these stocks? (The trend lines were strong, the product is well known, the price was low; some students may know the current price of these stocks.)
    3. Did anyone invest in just one stock? (Some students might because they think the company is a safe bet.)
    4. Did you put any of your money into bonds? (Many students will do this.)
    5. Why did you put some money into bonds? (They are safer; guaranteed return of 3%.)
    6. Did you keep any money as cash? (Many students will do this.)
    7. Is there any risk to cash? (Students will probably say no, but point out that inflation will erode the value of their cash, so it will not buy as much in the future.)
  2. Announce that now it is Sept. 23, 2002. Ask, "Do you know what is significant about this date?" (Most will not know. This was a low point in the stock market after the dot-com bubble burst.) Show Slide 15 listing September 23, 2002 prices for all of the stocks they have purchased. On the Teacher Dashboard page, change the date to September 23, 2002, and tell students to refresh their page. The stock prices will automatically adjust.

    HANDOUT ALTERNATIVE: tell students to record the new prices in Column 5 of their chart, then calculate the total value of their investments in Column 6. Allow 5-10 minutes for these calculations, checking on their work.

  3. Pose the following questions

    1. What happened to the value of your investments? (Most have gone down dramatically, anywhere from a 30% to 70% drop.)
    2. Which stock prices fell the most steeply? (The biggest losers were AMZN, DIS, F, HPQ, IBM, MSFT, TXN, TWX, and XRX.)
    3. Which stocks actually increased in price? (MMM, GIS, JNJ, PEP, SBUX, UNH)
    4. Did you buy these “winners?” Why or why not? (Most students don’t buy MMM, GIS, JNJ and UNH because they don’t know much about these companies, but some will have bought PEP and SBUX because they like the products.)
    5. Which stocks would you sell right now, if it really was 2002 and this was your college or retirement savings? (Many students will say they want to sell stocks that have lost value. Point out that although this is often what people do, it may not be the best strategy, as they will see.)
    6. If you put a lot of your money in bonds or kept it as cash, how are you feeling right now? (Very smart, glad to be cautious.)
  4. Explain to students that most financial experts agree that it is risky to put all of your wealth into just one investment. Ask students, "Did anyone keep some money in cash, spend some on bonds, and buy a variety of stocks?" (Some probably did this.) Explain that financial experts call this strategy “diversification.” An investor who has diversified will probably have losses in some investments but gains in others, so they will suffer less when the market has a downturn.
  5. Ask students to make note of any stocks they would want to sell. Explain that many people get out of the market during a downturn like 2002, which is referred to as a “bear” market. Some investors, however, who can afford short-term losses will buy stocks at this low point. Ask students if there are any stocks they would buy right now. (Some would buy the “losers,” seeing them as a good deal.) Explain that investors who are willing to take the risk and buy low during a downturn often earn high returns, although they risk losing their money if the company goes out of business. Ask students to make note of any stocks they would buy right now and their current prices.
  6. Announce that now it is Oct. 1, 2007. Ask, "Do you know what is significant about this date?" (Most will not know. This was a high point in the stock market before the financial crisis.) Show Slide 16 listing October 1, 2007 prices for all of the stocks they have purchased. On the Teacher Dashboard page, change the date to October 1, 2007, and tell students to refresh their page. The stock prices will automatically adjust.

    HANDOUT ALTERNATIVE: tell students to record the new prices in Column 7 of their chart, then calculate the total value of their investments in Column 8. Allow 5-10 minutes for these calculations, checking on their work.

  7. Pose the following questions:

    1. What happened to the value of your investments between 2002 and 2007? (Answers will vary. Most will rise dramatically.)
    2. What happened to the prices of the stocks you would have sold in 2002? (Answers will vary. AMZN, DIS, DOW, XOM, HPQ, IBM, and MON have all recovered; some stocks like TXN and TWX are still well below the January 2000 price. Point out that investors who are willing to take the risk and keep (or buy) stocks at a low point can earn high returns when the market recovers.)
    3. If you had sold them, how would you feel now? (Frustrated, disappointed, you would have lost a lot of money.)
    4. Could you have predicted that they would recover? (Not with certainty. Some companies are strong and can weather stock market fluctuations, but it was by no means certain in 2002 that Amazon would survive, when many other Internet-based companies shut down.)
    5. Which stocks would you have purchased in 2002? (Answers will vary. Amazon would have been a good choice, but it seemed very risky in 2002.)
    6. How did they perform? (If they bought the stocks listed in (b) above, they would have earned a lot of money; if they purchased TWX or TXN, they would not have profited.)
    7. Did students who diversified see an overall gain? (Most will, but their lower risk strategy could result in a lower return.)
  8. Explain that now students are going to calculate a rate of return for their investments. Pass out calculators as needed. Define rate of return as the earnings from an investment, stated as a percentage of the amount invested. Explain that first you will calculate a total return on the investment, then an annual rate of return. Show Slide 17. To determine the return on investment between January 2000 and October 2007, you will calculate the change in value, then divide by the initial value. Multiply by 100 to arrive at a percentage. As an example, imagine that you had invested all $100,000 in the stock market, and now your total shares of stock are worth $115,200. Ask students, "What is the percentage return on the investment?" (15.2%) Ask students to calculate their own total return on investment, comparing the 2007 value of their portfolio (including bonds and cash) to the $100,000 they started with. Ask several students to share their return on investment. (Answers will vary.)

    Ask students to assume, for the moment, that there was no significant price change between October 2007 and January 2008. That way, they can treat this as a full 8-year investment period. Refer to Slide 17 again and ask students, "What is the annual rate of return on this investment?" (Students will guess that they should divide 15.2 by 8. Explain that this is incorrect. Since the investment earned compound interest, not simple interest, you cannot simply divide to get the annual rate.) Show Slide 18 and explain that this formula will derive their annual rate of return, in decimal form. To account for the number of years (N), you use a power of (1/N). Again, they will need to multiply by 100 to convert it to a percentage. If students want to know why this formula works, ask them to imagine that an investment of $100 grew by 5% one year and 10% the next year. The asset value after two years would be $100 x 1.05 x 1.10 = $115.50. The total rate of return (using the formula from Slide 17) would be ($115.50 – $100)/$100 x 100 = 15.5%. The annualized rate of return can’t be calculated by dividing this in half because the interest was compounded. The 10% return in Year 2 was applied not to $100 but to $105, which confuses things. We need to tease out the compounding, which is why we use the formula in Slide 18. [($115.50/$100) ½ – 1] x 100 = 7.47% annualized return. The answer is close to what we would get by dividing by 2 (7.75%), but the more years that are involved, the more these two numbers will diverge.

  9. Use the sample data again, so that all students practice performing the calculation. Ask students: What is the annual rate of return on this investment? (0.0178 or 1.78%) How does that compare to the interest paid on bonds in this simulation? (Not very well. The bonds are paying 3% a year.) Ask students to calculate their own annual rates of return. Circulate to help as needed. Ask several students to share their results. (Answers will vary.) Explain that what they are doing is comparing rates of return on different ways they could have invested their money.
  10. Hand out Activity 5 to each group. Explain that they will use this sheet to calculate their group’s rate of return for each type of investment (stocks, bonds, cash) and their overall investment “portfolio” in 2002 and again in 2007. Give students time to perform these calculations and circulate to help as needed.
  11. If time allows, have students log in to Yahoo Finance symbol lookup (http://finance.yahoo.com/lookup ) to find the current price of each of their stocks. Show Slide 19 and ask each group to enter MMM to look up the stock MMM (3M). Show students the “max” button under the graph and ask them to click on this button to see a broader range of dates. Show Slide 20 and direct students to the date box in the lower right hand corner. They should type the current date in this box. Then they should put the cursor at the edge of the graph, as shown on the slide, so that the correct price appears. This may also be used as a homework assignment.
  12. Ask students to share their total returns on investment. (Answer will vary. Some students may have losses, others may have 100% or more in gains.) Ask students to share their annual rates of return. (Again, answers will vary. 5-10% is fairly typical with these stocks in this time period.) Explain that this simulation was designed to show them the long-term ups and downs of the market. In this simulation, all of the stocks picked were for corporations that endured the recession – none of them went bankrupt. Although some of the stocks lost money, the simulation was biased toward students earning gains over the long term.
  13. Remind students of the McClatchy graph (Slide 5) and that some stocks drop and never recover. If they are considering buying stock in a company, it is important to understand what is happening in the industry, such as Internet replacing print media. Although stock trading can bring large returns, they should not underestimate the risks.
  14. Tell students that you will pick the winning team – the team with the greatest gains or smallest losses, based on their total return on investment. However, you have not determined the ending date of the game. Explain that you will roll the die to determine the ending date of the game. If you roll a 1 or 2, the game ends in 2002. 3-6, the game ends in 2007. (If students looked up current data, you can use a roll of 5 or 6 to end the game with today’s date). Roll the die to determine the ending date. The purpose of ending on a random date (rather than the current date) is to reduce the ability of students to pick stocks based on current (hindsight) knowledge about stock prices.
Personal Finance