Grade: 10 Lesson # 5

Is investing worth the risks?

SS.912.FL.5.10: Explain that people vary in their willingness to take risks because the willingness to take risks depends on factors such as personality, income, and family situation.

Correlated Literacy Standards:

LAFS.910.RH.2.4: Determine the meaning of words and phrases as they are used in a text, including vocabulary describing political, social, or economic aspects of history/social science.

LAFS.910.SL.1.1: Initiate and participate effectively in a range of collaborative discussions (one-on-one, in groups, and teacher-led) with diverse partners on grades 9–10 topics, texts, and issues, building on others’ ideas and expressing their own clearly and persuasively.

Image: In a Free Market, individuals invest in the stock market

SS.912.FL.5.10: Explain that people vary in their willingness to take risks because the willingness to take risks depends on factors such as personality, income, and family situation.

Risky Business: Investment 101

Lesson Number (5):

Correlated Florida Standards (See Full Text on Cover Page)

  • LAFS.910.RH.2.4
  • LAFS.910.SL.1.1

Essential Question

  • What is investing?
  • What are common investment risks?
  • How does the rule of 72 for compound interest affect investments?
  • Why invest?
  • Why did Congress create the Securities and Exchange Commission?

Learning Goals/Objectives

  • Understand why people invest
  • Learn how to think about financial decisions
  • Understand key concepts associated with investing
  • Compare and contrast the short- and long-term consequences of investment decisions

Overview

  • In this lesson, the teacher will introduce to students the concept of investing. The lesson provides students with an understanding as to why people are willing to take risks because of behavior, income and household.

Materials

  • Background Information[if necessary, the teacher can use these resources to build their background knowledge]

“Why Invest?” (included in lesson)

“The Role of the SEC” (included in lesson)

“The Top 10 Terms Every New Investor Should Know” (included in lesson)

  • Chart paper
  • Handout # 1 “Low Vs. High-Risk Investments For Beginners” (included in lesson)
  • Handout # 2“Risk And Outcome” (included in lesson)
  • Bonds vs. Stocks [9:20]
  • The rule of 72 for compound interest [9:10]
  • Investing Basics: Mutual Funds [5:06]
  • Traditional IRAs[13:23]

Time

  • 50 minutes

VOCABULARY

■ Bonds

■Compound Interest

■High Risks

■ IRAs

■Low Risks

■ Mutual funds

■Opportunity Cost

■ Return

■ Stocks

Activity Sequence

INTRODUCTION/HOOK(5minutes)

  • Tell the students that today’s class will be devoted to discussing risks involved with investing. Ask the studentsabout their experiences in investing. Some students may have experience in investing, others may have minimum to no experience.
  • FLIPPED CLASSROOM [Technological pre-learning; Thispre-learning strategy is often accomplished online, with the teacher posting instructional videos for students to watch at home.]

Have students to view the following video clips:

Bonds vs. Stocks

The rule of 72 for compound interest

Investing Basics: Mutual Funds

Traditional IRAs

For each video clip, have students to write a brief summary in their journal on what it is, how it works, and what are the advantages?

1. Bonds

2. Compound Interest (Rule 72)

3. IRA

4. Mutual funds

5. Stocks

ACTIVITY

1. Introduction (5 minutes)

This lesson begins with the assumption that students have little to no background in finance or investing. If your students are already familiar with such topics, feel free to skip some of this introductory material.

Open the lesson by asking students to list (in their journal or on a loose sheet of paper) all of the things that they think about when they hear the word investment. Students will usually focus primarily on the stock market but should be also familiar with IRA and rule 72. Encourage students to think as broadly as possible. Other than the stock market, what images or ideas go along with the word investment? If students are stuck, ask them what it means to invest in your future? This will usually spur thoughts of college, equity such as buying a house or possibly having children (a liability not investment). If possible, display students’ answers on a Promethean, SMART or dry-erase board.

2. Definitions (5-10 minutes)

After this brief brainstorming session, give the students one to two minutes to create their own definitions of investing (i.e. What is investing?). Have students share their definitions with the class. A very general definition of an investment is: giving up something in the present in order to gain something more in the future. This definition has two key parts: 1) present sacrifice, and 2) future gain. As students share their individual definitions, try to reinforce these two ideas as much as possible. For example, if a student says, “An investment is a way to make money,” encourage the student to enhance this definition (an investment is giving up money/time in the present in order to make money in the future). For each student who shares his or her definition, try and repeat/reinforce the idea of present loss and future gain. Use this conversation to introduce the term return as a synonym for future gain.

3. Cooperative Group (5-10 minutes)

Divide your students into four groups. Assign each group a topic: Bonds versus Stocks, Compound Interest (Rule 72), Mutual Funds, IRA. Have the students illustrate -draw an image, explaining their topic.

4. Whole Group Instruction (10 minutes)

Using a read aloud strategy (choral, popcorn, etc…). Have students to read and discuss “Low Vs. High-Risk Investments For Beginners”.

5. Risk and Outcome Activity (5-10minutes)

After the cooperative group strategy, have the students in their small groups complete the Risk and Outcome activity. Provide each group with a copy of this handout. Give each group 5-10 minutes to work through the examples on the sheet.Use the handout examples to introduce students to the concept of risk. Which alternative did the students choose in the three example problems? Why did they make their choice? Define risk as the amount of uncertainty someone has about the future outcome. If an investment is a present sacrifice for a future gain, a risky investment is a present sacrifice for a very uncertain future gain.

CLOSURE(5 minutes)

  • Encourage students to think of examples of risky investments; professional athletes provide a good example. As young adults, they must invest a huge amount of time (and money) for a very uncertain (and unlikely) future reward. The lottery is another good example (although with less present sacrifice). Which is more risky? This is a discussion that will continue in the next lesson.

OPTIONAL EXTENSION SUGGESTION/HOME LEARNING

  • Outside of the classroom, ask students to pay attention to TV commercials. Ask each student to pick one particular commercial. What is the message of the commercial? Is the commercial asking you to make an investment? What is it asking you to give up? What are they offering you in return?

BACKGROUND INFORMATION

Why Invest?

A few people may stumble into financial security. But for most people, the only way to attain financial security is to save and invest over a long period of time. You just need to have your money work for you. That’s investing.

There are two ways your money can work for you:

• Your money earns money. Someone pays you to use your money for a period of time. You then get your money back plus “interest.” Or, if you buy stock in a company that pays “dividends” to shareholders, the company pays you a portion of its earnings on a regular basis. Now your money is making an “income.”

• You buy something with your money that could increase in value. You become an owner of something that you hope increases in value over time. When you need your money back, you sell it, hoping someone else will pay you more for it.

Compound interest is a key aspect of investing. With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount of savings can add up to big money and help you achieve your financial goals.

Sweet: If you buy a $1 candy bar every day, it adds up to $365 a year. Put that $365 into an investment that earns 5% a year, and it would grow to $465.84 by the end of five years. By the end of 30 years, you would have $1,577.50. That’s the power of “compounding.”

All investments involve some degree of risk. If you intend to purchase securities such as stocks, bonds, or mutual funds, it's important that you understand before you invest that you could lose some or all of your money.

Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money you invest in securities is not federally insured. You could lose your principal, which is the amount you've invested. That’s true even if you purchase the securities through a bank.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long-term horizon, you may make more money by carefully investing in higher-risk assets, such as stocks or bonds. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals. The principal concern for individuals investing in cash equivalents is inflation risk, which is the risk that inflation will outpace and erode returns.

Source:

The Role of the SEC

Mission

The U. S. Securities and Exchange Commission (SEC) has a three-part mission:

• Protect investors

• Maintain fair, orderly, and efficient markets

• Facilitate capital formation

Congress Created the SEC

When the stock market crashed in October 1929, so did public confidence in the U.S. markets. Congress held hearings to identify the problems and search for solutions. Based on its findings, Congress – in the peak year of the Depression – passed the Securities Act of 1933. The following year, it passed the Securities Exchange Act of 1934, which created the SEC.

The main purposes of these laws can be reduced to two common-sense notions:

• Companies offering securities for sale to the public must tell the truth about their business, the securities they are selling, and the risks involved in investing in those securities.

• Those who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly.

Source:

The Top 10 Terms Every New Investor Should Know

Investing isn’t simple – it requires lots of decisions, from where to put your hard-earned money to how long you want to keep it tied up in any one investment. Even talking about investing can seem challenging, since financial experts use a language all their own to communicate their ideas.

Still, “It’s empowering to know how to take care of your money,” says Paula Hogan, a financial advisor in Milwaukee, Wisconsin “People who are smart about money matters have more options in life. It’s part of being an independent, competent adult.”

Becoming a savvy investor starts with looking, listening and building on what you already know. “What do you observe about how the people you know handle money? Whom do you want to emulate? Read the personal finance columns in your local newspapers and online. Understand the power of saving early, and develop a habit of saving a specific portion of every dollar you earn or receive as a gift, no matter what.”

To help with some basics, Knowledge@Wharton High School has come up with a Top 10 list of terms that every new investor should know. Learn these and you’ll be well on your way to navigating the investment landscape.

  1. Return on Investment. Return on Investment, or ROI, refers to how much you’ll earn (or expect to earn) as a percentage of your investment. So if you’re investing $100, and you get back $110 (a $10 profit), your ROI is 10%. Generally, you hope to get a higher ROI on a riskier investment.
  2. Cash. Everyone knows that cash refers to bills, coins and other kinds of currency. When financial advisors talk about moving some of your portfolio, or investments, into cash, they don’t mean you should hang on to a bunch of dollar bills or other type of currency. Instead, they are usually referring to liquid investments, or investment vehicles that are easily swapped for cash, like certificates of deposit (CDs), Treasury bills or money market accounts.
  3. Portfolio. A portfolio is a collection of investments owned by the same person or company. An individual typically builds his or her portfolio with different kinds of company stocks or different types of investments, such as stocks, bonds and mutual funds. You will often hear the phrase “diversified portfolio” to refer to a portfolio that has spread its risk over different types of industries and/or investments.
  4. Asset Allocation. This refers to your plan, or strategy for your investments. You could put all of your money in a single investment, like buying stock in one company — but you could lose out big-time if it doesn’t do well. Instead, you could try to balance your risk by investing among several companies. That way, if one goes down, another may still go up. Some financial advisors go even further by suggesting that you put your money in different classes, or types of investments, like cash, bonds or stocks. Check out the related stories in the toolbar to learn about the various types of investments.
  5. Bonds and Stocks. Bonds are where you loan money to an entity – usually a company or a government body – in exchange for a promise that they will pay you interest on your money. Bonds are a little riskier than cash investments (what if the company goes bankrupt?), but will usually pay more interest than a banksavings account.Stocks are basically an ownership interest in a company. So, if a company does well, the price of the stock will probably rise, and the company may even pay dividends to stockholders. However, nothing is guaranteed, and you can lose part or all of your initial investment if a company doesn’t perform well.
  6. Risk Tolerance.It’s important to remember as a new investor that all investments involve some degree of risk. The reward for taking on a riskier investment may be a higher return — or not, depending on the performance of that investment over time. As you invest, you need to understand your own tolerance for risk. Are you OK with the idea of potentially losing money to get better results? Then you have a high risk tolerance. If you would rather take a safer investing path, then your risk tolerance is lower. Sometimes, it depends on where you are in the investment lifecycle. Typically, the younger you are when you start investing, the higher your risk tolerance and your potential for greater long-term results since you have more time to realize that investment.
  7. Mutual Fund. This is when a group of investors gets together to buy assets like stocks and bonds. But rather than calling your friends and family and getting them to pool their money – which would probably take you until the next century to pull off – a mutual fund does all the legwork of bringing investors together and diversifying assets. A mutual fund may hold hundreds or more of stocks or other financial instruments, reducing the possibility of loss from any one investment. Professional money managers typically make the investment and selling decisions.
  8. Securities and Equities.They are two different things! Securities refer to different types of investments, such as stocks, bonds and mutual funds. Equities refer specifically to stocks, or shares in a company.
  9. Price-to-earnings Ratio. The P/E ratio, as it’s often called, refers to a company’s stock price as a percentage of its per-share earnings. A low P/E is usually 0 to 10 (a company that earns $1 a share and has a $10 per share stock price has a P/E ratio of 10), and might be a signal that the company isn’t doing too well. A high P/E ratio, above 25, could mean that investors expect the company to do really well in the future. It’s important to note that a low P/E could also mean that investors haven’t realized the company’s potential for growth, while a high P/E could mean that people are over-valuing the company because they think it’s worth more than it actually is. In times like that, a stock price might be in danger of plummeting, and thus causing investors to lose money. Considering the P/E ratio might be a good starting point as you go about picking stocks for your portfolio, but financial advisors suggest that you still need to research a firm more deeply before investing in it. What’s behind those numbers?
  10. Prospectus. When it comes to investing, research is really important. Want to find out about a company or fund before you invest in it? Get the company prospectus, a legal document, filed with the Securities and Exchange Commission (SEC), which provides details about the expenses, finances and other important company info. But remember, a prospectus is a description and should be considered one tool in stock picking — it is not a guarantee of results, even if the prospectus has been approved by the SEC.

That’s it for our Top 10. Financial advisor Hogan also recommends that new investors familiarize themselves with the following terms: