Each of us seek to make wise investment decisions that will make our money grow. Unfortunately, we cannot predict the future, but the past can give us a window to understanding the risks and rewards of investing in the stock market. This lesson will track the history of a Dow Jones 30 stock and enable to student to calculate the return on his investment.
Sara had the good fortune to have a generous grandparent who gave her $1000. The grandparent told Sara to invest the money over a five year period and to use her 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 the students to look at the historical pricing of selected stocks to give them an idea of how their investment may work for them. By going back five years in pricing history, the lesson reinforces the importance of being a long term investor. Students 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. But this lesson goes further and reminds the students of some factors that deplete returns. The students will learn that their actual return is reduced by inflation, transaction costs, and taxes. It is similar to their take-home-pay not being what they 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.
- Track the price history of selected stocks on the Dow Jones 30.
- Describe how inflation, transaction costs, and taxes impact returns.
- Calculate real and nominal returns on investments.
Dow Jones 30: Lists the companies that belong to the Dow Jones 30.
Symbol Lookup: Allows you to find stock symbols of companies.
Historical Quotes: Allows you to get historical prices quotes
What is a dollar worth?: For a better understanding of the impact of inflation on an investment
Handout: Click the below link to practice figuring nominal and real total returns.
Security and Exchange Commission: The home page of the SEC. The SEC protects investors and markets.
Protection Against Scams: The page from the SEC website provides information on investment scams.
To accomplish this task the students must go through the following process.
Select a Dow Jones 30 stock.
Dow Jones 30
If this lesson is being presented to a large class, have each student select one stock. This might provide some interesting comparisons at the end of the task.
Once a student selects a stock, it is important that he or she have the symbol for that stock.
Stock Symbol Lookup
The students then need to be directed to use the Internet site to chart the price history of the company they selected over the past five years. The students should go to Historical Quotes: where they can find historical price quotes.
This is a flexible task. You can simply look at the purchase price in 1997 and the selling price in 2002, or you can develop a graph or chart showing the changes over the five year period.
When the students open the stock history table, they should use the column labeled "Adjusted Close." This will adjust the price for dividends and splits. You might want to go over these terms with your students.
- Finally, have the students use the information from the price history to fill out the nominal and real total return handout. Have the students write a summary comparison of the results. [Nominal refers to the actual dollar price of stuff when it's bought or sold. The contrast is with the term real, which is actual value adjusted for price changes or inflation.]
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. Closure would be a good time to compare stock market investments to other alternatives. (Savings Accounts, Certificates of Deposit, Mutual Funds, etc.)
Evaluate student learning by reference to the following:
- 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.