Why Do People Invest in Stocks?

Grade: 6 Lesson#9

Why Do People Invest in Stocks?

SS.8.FL.5.3-Discuss that when people buy corporate stock, they are purchasing ownership shares in a business that if the business is profitable, they will expect to receive income in the form of dividends and/or from the increase in the stock’s value, that the increase in the value of an asset (like a stock) is called a capital gain, and if the business is not profitable, investors could lose the money they have invested.

Source: thedailyvoicenews.com

Correlated Literacy Standards:

LAFS.68.WHST. 3.9Draw evidence from informational texts to support analysis reflection, and research.

LAFS.6.RI.1.2Determine a central idea of a text and how it is conveyed through particular details; provide a summary of the text distinct from personal opinions or judgments.

Why People Invest in Stocks

Lesson #9

Correlated Florida Standards (See Full Text on Cover Page)

LAFS.68WHST.3.9

LAFS.6.RI.1.2

Essential Question

What are the benefits and possible risks involved in investing in stocks?

Learning Goals/Objectives

Students will define the term “stock.”
Students will be able to describe both the risks and possible rewards from investing in stocks..
Student will understand that the owners of profitable stock sometimes receive dividends (i.e., a portion of the company’s profits).

Overview

Students will understand that people who buy stock in a company are actually part owners of that company. Students will also learn that they may make a profit on stocks, but they also risk their money based on the success of that company.

Materials

Access to technology to view the video entitled, How 4th Graders Beat the Stock Market at (The link is included in the file.)
Copies of the Student Reading entitled, Stocks as Investments. (Included in the lesson.)
Copies of the Student Activity Sheet entitled, Questions – Stocks as Investments. (Included in the lesson.)
For homework - Copies of the Student Reading entitled, Who Wants to Own McDonalds? (Included in the lesson.)

Time

50 minutes, plus time for homework.

Activity Sequence

INTRODUCTION/HOOK(10 minutes)

Ask students if they know what the stock market is and how it works? Explain that in today’s lesson, students will learn about stocks, the stock market, and how purchasing stocks makes a person a part owner of a company.

Ask (for fun): Are you smarter than a fourth grader? Let’s see how two 4th graders were given the opportunity to invest “play money” in the stock market and won!

View the CNN Money video entitled, How 4th Graders Beat the Stock Market. The video may be accessed at

ACTIVITY(35 minutes)

Have students read the Student Reading Stocks as Investments and answer the Student Activity Sheet Questions – Stocks as Investments. (Both are included in the lesson.)

Orally review the answers to the questions with students making corrections, as needed.

As homework, have students read, Who Wants to Own McDonalds? (Included in the lesson.) The following day, divide the class into groups of 3 or 4 to discuss the reading.

CLOSURE(5 minutes)

Review what they learned as a result of this lesson: What is stock? What are the benefits of owning stock? What are the risks of owning stock?

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING

At home, have students explore the stock market further either on line or by looking at a newspaper. Have them select two companies to invest $1,000 in “play money.” Have them first research the company to see what goods or services it provides. Then, have them chart the progress of the selected stocks for a two-week period to determine if the stock has potential as an investment.

Sources/Bibliographic Information that contributed to this lesson

Stocks as Investments

What are Stocks?Stocks are units of ownership in a company. When a person buys stock in a company, he or she owns a tiny part of that company. When a person buys stock, he or she is known as a stockholder.

When a company is doing well and selling a lot of products or services, the value of the company goes up. The price of the company's stock goes up, too. Then, a stockholder can choose to sell the stock and make a profit or hold on to it and hope it continues to rise. Some companies pay dividends to shareholders who buy their stocks and keep them as a long-term investment. Dividends are part of the company’s earnings paid as cash bonuses to the shareholders.

What is the Stock Market?The stock market is where stocks are "traded" - meaning bought and sold. The stock market serves as a marketplace for different companies. People can buy and sell stock from many different companies in the stock market.

Why Do Companies Sell Stocks? Companies sell stocks to raise money to do the following:

Research better ways to produce products or sell services;
Create new products;
Improve the products they sell;
Hire more employees; and
Enlarge or modernize their buildings.

How Do You Make or Lose Money in the Stock Market? As a shareholder, you own a "part" of the company. If the company's profits go up, you "share" in thoseprofits. If the company's profits fall, so does the price of your stock. If you sold your stock on a day when the price of that stock falls below the price you paid for it, you would lose money. Investors who hold stock for 15 years or more usually succeed in the stock market. Still, there are no guarantees.

Sources: This reading was adapted from the following sources:

Questions – Stocks as Investments

Name: ______

Define each of the following terms:

a)Stock:

b)Shareholder:

c)Dividend:

d)Stock Market:

Companies sell stocks to help their company grow. List 3 specific reasons why companies sell stocks.

In your own words, explain the following.

a)How you can make money by investing in stocks?

b)How you can lose money by investing in stocks?

Decide if the statements below are FACT or OPINION. Explain why. Use the back of this paper if you need more room to write.

a)Buying stocks is a good investment. ______

b)When a company is doing well, the price of the company’s stock usually goes up, too.______

c)Dividends are part of a company’s earnings paid as cash bonuses to shareholders. ______

d)Investors who hold stocks for 15 years are longer usually succeed in the stock market. ______

Who Wants to Own McDonalds?

Name______

Big Jake is Maria's best friend, but sometimes his impractical ideas are a bit much, even for Maria. Yesterday was a good example. He embarrassed her at McDonald's just because he was ignorant about stock ownership and insects. Stock ownership and insects? Yes.

Let’s see…It all started when Big Jake stopped by Maria's house and asked her to go to lunch at McDonald's. "Nothing like fries and a burger and something special for lunch," he said, as they walked over to the local Mickey Ds.

"Something special?” she asked. But he just ignored her as he walked along, carrying a carefully folded brown paper bag.

At the restaurant, Big Jake offered to buy lunch. He asked Maria to find a table and to guard his brown bag. "Don't look inside, it's a surprise," he said. That should have been enough warning, Big Jake buying lunch and asking her to guard a brown bag; but she just went along with everything because her brain was concentrating on food – she was starving.

In several minutes, he joined her at the table with the food and a bad mood. "What is the matter?" she asked. "Didn't they give you good service?"

"Oh, yes," Big Jake grumped, "but apart from the service she was so uncooperative! I said I wanted to see the owner about this great idea of mine, but she said she was the localfranchiseowner. I said, “So you own all the McDonald's in the world?' And she said, "No, it is impossible to talk to ALL of those owners.” Then she started waiting on the next customers. She's so rude!" Big Jake complained.

"Actually," Maria replied, "she is right. There are over several hundred thousand owners of McDonald's! The number changes all of the time. Maybe you should become an owner."

"That's a great idea," Big Jake replied. "Then I could have the restaurants serve my favorite foods and I could eat free. If I own the business, then I get to run it my way, right?"

"Not exactly," Maria replied. "I learned a lot about ownership and business by talking about financial literacy in Ms. Kaspar’s class. If you want to become a part owner of McDonald's, all you have to do is buy stock in that company. You become a part owner of the company, but many other people will also have bought stock in the company. Thousands of people! So you are only one of many people who share its ownership. That's why stocks are called shared."

"But I could only eat a tiny share of all the food McDonald's cooks each day," said Big Jake. "As a part owner, couldn't I eat part of their food?"

"No, you couldn't. McDonald's has close to 900 million shares of stock. That means that the ownership of every hamburger McDonald's produces is kind of divided into 900 million parts. If you buy one share of McDonald’s stock, then you would own one of 900 million parts of each hamburger." Ha! Let’s see you get full on that, Big Jake.

"That's hard to imagine," said Big Jake. "That little bit wouldn't fill me up."

"And the same would be true for the company's buildings, stoves, and furniture. You would own only one 1/900 millionth of each thing, even the Happy Meal toys!”

"Well, maybe I could decide what food to put on the menu if I were an owner of McDonald's stock," Big Jake said. "They are really missing a sure bet by not offering a more varied menu."

"Actually, you can't do that either," Maria replied. "For each share of stock, you get one vote for the company's top managers, or directors. With so many owners or stockholders, you by yourself would not have a big influence on what the company offers as its menu. Actually, executives and managers run the company for you and the other stockholders."

"So whatwouldI get for buying a share of stock in the company?" asked Big Jake. "It doesn't sound like much of a deal to me."

"Each share of ownership entitles you to some of the profits the company earns," she explained. "But profit is not a sure thing. If people don't like the food, the company wouldn't earn enough money to cover the costs and earn a profit. Any business is risky because the future is uncertain. A company could spend lots of money for buildings, equipment, or developing a new product. But, if customers don't like the product or if prices are too high or products of other restaurants are more attractive, business income will be too low. Success is never a sure thing, so there is always a chance of losing your money. Any business is risky and someone has to bear that risk. That's what stockholders do as owners of a business."

"Sounds exciting," said Big Jake. "So why buy a stock and risk losing money?"

“Because you can make a gain also. You think the business will earn a profit on the product, so you take the risk. The possibility of earning a profit gives the owners and managers of abusiness an incentive to produce something consumers want to buy at a price they are willing to pay. If the business succeeds, its owners will earn a profit. That is the reward stockholders get for risking their money. Customers also benefit because they get something they like. Employees of the business benefit because they have a place to work and earn income. It's like they're all on one big team with the same goal. But owners are the only ones who risk their own money on whether the goal is accomplished."

"So by buying a stock," Big Jake said, "I become a business owner who takes part of the risk that the company might fail. But if the company succeeds, I may get some of the company's profit. I'd like to do this, because I know McDonald's could make a profit from my new menu idea. It's tasty, inexpensive to produce, and everyone in my family likes it."

Then Maria asked the fatal question. "Big Jake," she said, “What is the food you think McDonald's should have on its menu?"

“Look at this great stuff!" Big Jake shouted as he opened the bag and dumped the contents onto their food plates." Over at Windy Willows Community Center where all my relatives live, this is our favorite food. Try some. It's got chocolate on it. I know you will like it."

The food was very small - bite sized - and very tasty. The chocolate taste was good, but Maria noticed an unusual aftertaste that was unpleasant. Other people sitting nearby were interested, so Big Jake also shared it with them. Even the McDonald’s franchise owner came over to see what the fuss was about and tried some. Everything was going great until someone asked, "What is this food?"

Big Jake answered, “Chocolate covered bugs!”

On the way home Maria was mad enough to spit. "How could you embarrass me that way? You know most people do not like to eat ants, flies, mosquitoes, and earthworm parts. Now we can never go back to that McDonald's Restaurant! I know for sure McDonald's will never hire you to decide on their food menu. Can you imagine what would happen to their sales if they served your food?"

"I'm sorry," Big Jake replied. "I just thought that the chocolate flavor would take care of the problem."

Source: Activity adapted from Council for Economic Education, New York, NY
Learning from the Market: Integrating SMG Across the Curriculum, Lesson 3 at

Questions for Discussion:

How many people own McDonald's? Why isn’t the number exact?

Why would people wish to buy McDonald's stock?

How do you become an owner of McDonald's?

What are the benefits of stock ownership?

What are the risks of stock ownership?

How do profits help McDonald's?