Stock Market Game Sample Lesson Plan

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Stock Market Game Sample Lesson Plan

• Prepared By
• Sara Tonks, B.sc, MBA

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Stock Market Game

• Objective
• To help get a better understanding of stock
  markets, how they work, what factors influence
  them, and their volatile nature. As well,
  students will learn some rudimentary, but
  important, approaches to picking stocks for an
  investment portfolio.
• Note many of the concepts presented in this
  lesson plan can be further expanded into future
  lessons.

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Stock Market Game

• Teachers Preparation
• Go to statistics Canada website and in a table
  record the values of some of the common leading,
  coincident and lagging indicators (noted below)
  over a number of periods.
• Have students bring in the stock listings section
  of the newspaper (Globe and Mail). Or
  alternatively, copy a section of the listing,
  including the section of How to read stock
  listings.
• visit Investopedia to get definitions of common
  investing terms.

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Stock Market Game

• Teachers Notes
• Start the lesson with some interesting stories
  about stocks and the stock market, such as some
  of the big scandals and some of the big winners
  (Scandals BreX, Enron, Worldcom. Winners
  Microsoft, )

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Stock Market Game

• What is a stock?
• Stock is ownership of a company. When you
  purchase stock or shares of a company your are
  becoming a part-owner of it. As owners of the
  company, shareholders are entitled to the
  earnings of the firm.

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Stock Market Game

• What is a stock continued
• Some profitable companies pay out some or all of
  these earning to shareholders as dividends, while
  other firms will re-invest the earnings to grow
  the company. The underlying assumption being the
  shareholder will enjoy greater earnings in the
  future if the company grows.

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Stock Market Game

• Continued
• Investors will pick shares in companies that are
  profitable (and are expected to stay profitable)
  or in companies that are expected to become
  profitable.

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Stock Market Game

• Possible Discussion
• What makes a company profitable?
• Name some companies that have good products (or
  popular products) and probable have good sales?
• If you wanted to own any of these companies,
  which would you choose (top three ranking, for
  example)?

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Stock Market Game

• Factors affecting stock prices
• Now start to examine some factors that can affect
  stock price. This will lead to a discussion of
  the categories of stocks (Cyclical, or
  defensive), the business or economic cycle, and
  diversification.

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Stock Market Game

• Discussion
• What are some possible factors that affect the
  product sales of a firm?
• Product is a fad - in style or out of
  style(examples..)
• Product is poor/good quality (Example class
  action suite against Maytag on faulty front load
  washer Mercedes Benz)
• People can no longer afford to buy the product.

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Stock Market Game

• Continued
• With the last point lead a discussion on what
  types of products and services are not bought
  when people have less money to spend.

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Stock Market Game Activity One

• Activity One
• Have students work in groups and list 5 products
  they would no longer purchase if their household
  income was drastically cut, and 5 products they
  would continue to buy.

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Stock Market Game

• From this activity lead a discussion on what are
  cyclical stocks and what are defensive stocks.
  Cyclical stocks prices move with the business
  cycle increase during boom-times, and decrease
  during slow-downs or recessions. Defensive
  stocks tend not to fluctuate significantly as a
  result of changes in business cycle.

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Stock Market Game

• Continued
• Examples of firms with cyclical stocks are those
  in the automotive, airline, travel,
  entertainment, and fashion industries. Examples
  of firms with defensive stocks are utility firms,
  those that sell consumable products (food, and
  personal hygiene products for example).

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Stock Market Game

• Economic indicators or businesscycle indicators
• Stock market investors, engaged in active trading
  (or investing) closely watch economic or business
  cycle indicators in an attempt to predict
  economic changes that will affect the stock
  markets. These investors will move their money
  to minimize losses and maximize profits.

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Stock Market Game

• Continued...
• Generally the business cycle indicators are
  grouped into three categories Leading
  Indicators, Coincident Indicators, and Lagging
  Indicators.

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Stock Market Game

• Continued...
• Leading indicators tend to peak before the entire
  economy. The most important leading indicators
  include housing starts, manufacturers new
  orders (especially for durables), spot commodity
  prices, and money flows. Statistics Canada
  combines a series of ten leading indicators into
  a single index the Composite Leading Indicator.

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Stock Market Game

• Continued...
• Coincident indicators change at approximately the
  same time and in the same direction as the
  economy. These indicators include GDP,
  industrial production, personal income, and
  retail sales.
• Lagging indicators tend to change after the
  economy has changed. The most common ones are
  private sector plant and equipment spending,
  unemployment rate, labour costs, levels of
  inventories, and inflation.

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Stock Market Game Activity Two

• Activity Two
• Give to the students the indicator data you have
  collected, have them use that data to suggest the
  stage of the business cycle. Group work is
  suggested followed by class discussion.

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Stock Market Game

• Why invest in the stock market?
• Investors typically can earn more money buying
  stocks than they can by having the money sit in a
  savings account at the bank. Why? At this point
  introduce the notion of Risk and Reward, or risk
  and return.

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Stock Market Game

• Continued
• Explain there are two ways investors make money
  from purchasing stocks capital gains, and
  income.
• Show calculations for capital gain, and dividend
  yield, and return on investment.

Stock Market Game Lesson Plan 1
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Stock Market Game

• Main investment objectives of the typical
  investor
• Preservation of capital, income, and capital
  growth. (Explain what these terms mean)

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Stock Market Game

• Diversification
• Dont put all your eggs in one basket In
  general terms explain the theory behind portfolio
  diversification and support it with a simple
  exercise

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Sample Exercise

• Exercise
• Bill invested 100,000 in stocks. He bought
• 500 shares of Winbig Corporation at 100 a share
  and
• 500 shares of Cheeseball Corporation at 50 a
  share and
• 15,000 shares of Flybynite Corporation for 5 a
  share.

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Sample Exercise

• Exercise Continued
• Brandon also invested 100,000 in stocks. He
  bought
• 500 shares of Bigbank Corporation at 100 a
  share
• 100 shares of Winbig Corporation at 100 a share
• 200 shares of Oldsteady Corporation at 50 a
  share
• 200 share of Oilman Corporation at 50 a share
• 4000 shares of Flybynite Corporation for 5 a
  share.

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Sample Exercise

• Exercise Continued.
• After a year the stock prices per share were?
• Bigbank 150
• Winbig 170
• Cheeseball 60
• Oldsteady 80
• Oilman 75
• Flybynite 0

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Sample Exercise

• Exercise Continued
• Calculate the value of Bills and Brandons stock
  portfolios?

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Stock Market Game Activity Three

• Activity Three
• Pick some stocks and ask the students to record
  the price. as shown on the stock market listing.

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Picking stocks

• Looking at the financial health of a company
• The financial statements of firms are usually
  available to see from the firms website.
  Another place to find concise and comparative
  financial information about public companies is
  the Globe and Mails Report on Business website.

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Picking stocks continued

• When trying to establish the financial health of
  a firm there are key ratios to consider. They
  are grouped as liquidity, debt (or leverage),
  profitability, and value ratios. Some of the
  common ratios are

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Ratio analysis

• Liquidity
• Working capital ratio current assets/current
  liabilities
• Quick ratio (current assets
  inventories)/current liabilities

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Ratio analysis

• Debt
• Debt/Equity Total outstanding debt (short
  long term)/book value of shareholders equity
• Interest coverage (net earnings equity income
  minority interest of subsidiaries all income
  taxes total interest charges)/interest charges
• Asset Coverage Total assets deferred charges
  intangible assets (current liabilities less
  (short term debt current portion of long term
  debt))/(total debt/1000)

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Ratio analysis

• Profitability
• Gross margin net sales cost of goods sold/net
  sales
• Net profit margin net earnings equity income
  minority interest of subsidiaries/net sales
• Net return on invested capital net earnings
  total interest charges(after tax)/invested
  capital
• Inventory turnover cost of goods sold/inventory
• In days 365/inventory turnover

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Ratio analysis

• Value
• Earnings per common share Net earnings
  preferred dividends/number if common shares
  outstanding
• Price Earnings ratio current market price of
  common share/earnings per share
• Dividend yield (indicated annual dividend per
  share/current market price per share) x 100.

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Picking stocks continued

• When looking at ratios compare ratios of same
  company over time, to look for trends and compare
  the ratios of one company to those of competing
  companies in the same industry

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Things to consider

• 52 week high/low compared to yesterdays closing
  if significantly different, why?
• Volume of trades high/low, why?
• Yield

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Things to consider continued

• PE ratio (explain what it is and how it is used)
  PE ratio is stock price divided by most recent
  earnings data of the company. The ratio is one
  way to easily compare one stock with another
  (presumable from the same industry). A low PE
  can indicate a stable and mature company (the
  price of the stock reflects the earnings
  expected), where as a high PE is more likely an
  indication of an emerging or expected growth
  company (the price of the stock reflects the
  markets expectation of good future earnings).

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Things to consider continued

• Key ratios (is the company profitable, is there
  value in the investment, is the leverage high or
  low, is the liquidity high or low compared to
  other companies in the same industry)
• Economic indicators what stage is the business
  cycle
• What is the relationship of the firm with the
  business cycle (cyclical or defensive)

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Things to consider continued

• What are your investment objectives? Looking for
  growth (capital gain), income (dividends),
  willing to bear more risk for greater return, or
  need to preserve capital and therefore minimize
  risk.

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Things to consider continued

• The balanced portfolio includes the investments
  from three major classes cash and cash
  equivalents fixed income securities (bonds and
  preferred shares) and common shares. The
  proportion of each type of investment in the
  portfolio will be determined by the investment
  objectives of its owner.

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Stock Market Game Activity Four

• Activity Four
• Taking the above factors into consideration, have
  the students pick a portfolio of stocks from
  those listed on the SMG site in preparation to
  play the stock market game.