HOW TO CHOOSE A GOD STOCK

Alfred Williams 9:56 AM 0

INTRODUCTION In this lesson, students match stock selections to stock purchasing strategies; they gain experience in finding the company that produces a particular product and in identifying the parent company of a particular business. ECONOMICS BACKGROUND Like everybody else, people who buy stocks face scarcity. Their money is limited, so they must choose among stocks. In choosing, they try to weigh potential costs and benefits, hoping to maximize the benefits. They rely heavily on various types of information about the stocks they consider, and they pay a cost (in money or effort) to obtain this information. Information about economic expansions and contractions is especially valuable. LANGUAGE OF ECONOMICS Capital: Human-made resources used to produce goods and services. Capital goods are used by people to produce and distribute goods and services. Cyclical Stocks: Stocks, such as high-priced consumer goods and capital goods, which are significantly affected by business cycle fluctuations. These stocks generally decline more during recessions and show more growth during expansions, than other stocks. Defensive Stocks: Stocks, such as medicine, food, clothing, and public utilities, that are relatively unaffected by business cycle fluctuations, generally decline less during recessions, and show less growth during expansions than other stock. Dividends: The amount of profit a company pays to its stockholders. Early Phase of Development: The condition of a company that puts a product or service on the market for the first time; its sales are expected to grow rapidly. of costs and benefits, choosing the best combination of costs and benefits from among the alternatives. Growth Stock: A stock whose earnings andprice are expected to show big increases in the future. Income Stock: A stock that has paid sizable dividends in the past and is likely to do so in the future. Industry: A group of companies that produce or sell the same kind of product or service. Late Phase of Development: The condition of a company whose product or service has been on the market for awhile, and its sales are no longer expected to grow rapidly. Long-term Investing: Buying stock and keeping it for many years in an effort to have one’s money grow in step with stock prices in general. Parent Company: A business that owns and controls another company. Recession: A decline in Real Gross Domestic Product (GDP) for a period of at least six months. During a recession, businesses produce fewer goods and services. Risk: The chance of losing money. Risk is the opposite of safety. Short-Term Investing: The buying of stocks in order to sell them quickly in an effort to have one’s money grow faster than the general level of stock prices. Stock Table: An alphabetical listing of the transactions on the stock exchanges. CROSS CURRICULUM SKILLS: Students develop skills in writing, speaking, reading, and group participation. OBJECTIVES 1. Students describe strategies for stock selection as they identify factors that might result in greater benefit than cost. 2. Students analyze stock choices and identify the appropriate stock selection strategies. 3. Students identify the company that produces a particular product and the parent company of a particular business. 4. Students identify characteristics of economic cycles and predict the influence of cycles on consumer choices and stock performance. MATERIALS u Visuals 1 and 2 u Activities 1, 2, 3*, 4*, and 5* u Newspaper stock tables TIME REQUIRED Two class periods PROCEDURE A. Now that the students have decided to invest in the stock market, they need a few tips on selecting stocks wisely. Remind the class that there are costs and benefits involved in any decision, including decisions about stock selection. This lesson will help them select a stock and find the name under which it is traded. To select, they need a strategy. Explain that a strategy is a way of methodically pursuing a goal. A strategy is a way of reducing risk. B. Ask the students to imagine for a moment that buying a stock involved no risk. Ask: What are the characteristics of a perfect stock? Encourage some speculation. Display Visual 1, Wombat, Inc. would this company be a good choice? Discuss each characteristic, encouraging students to explain why these factors tend to make this a perfect choice. (There must be a market for the product; if people are buying the product, especially if they buy lots of it, the company will do well, the stock will be valued, and the price will rise. The company will probably have higher profits since the cost of distribution and production, the major determinant of supply, is low. The expected long life of the company and excellent earnings will support the value and price of the stock.) C. Explain that Wombat, Inc. is not a real company, and no company has all these characteristics, but the example helps us to think about what we might look for when choosing stocks. D. Tell students that they are now going to examine strategies that others have suggested for reducing the risk involved in buying stocks. Distribute Activity 1, Strategies for Stock Selection. Read and discuss each section. Tell students that there are many other strategies, but these examples should get them started. Answers to Activity 1 1. What is Peter Lynch’s advice for pickingstocks? (Buy what you know. Stock tips are all around us. You can spot a good stock before Wall Street does.) 2. Give an example of a stock that you think has a growing market. (Answers will vary.) 3. What is an example of a good stock to buy in a recession? (A stock in a defensive industry such as medicine, food, clothing, public utilities.) Example of a good stock to buy in an expansion? (A stock in cyclical industries such as cars and appliances, or raw materials like aluminum, steel, tools, and equipment.) 4. Why should you beware of front-page stories? (If the stock is news, then everyone else knows about it.) 5. Explain how changes in technology affect stock prices. (Changes in technology could make the product obsolete, thus depressing the stock’s price, or changes could increase demand for the product, thus increasing the stock’s price.) E. Ask students to use the Peter Lynch strategy of “buy what you know.” Ask the students to name a product or service that they think is as good as or better than other products or services on the market. When they have come up with several examples, settle on one or two to examine further. Display Visual 1 again and ask students how this product or service compares to the fictional Wombat, Inc. Then display Visual 2, Strategies for Stock Selection—Summary, a summary of the reading. Ask students to take the product or service they selected through each of the considerations in stock selection. For example, what are the current markets for this product? Who will buy it? Can it be sold overseas? How would it fare in good times or lean times? Discuss each question, then decide whether the company warrants further research. F. Continue to display Visual 2. Distribute Activity 2, Matching Strategies to Stock Selections. Divide the class into groups. Ask students to read and discuss each statement. For each statement they are to identify and describe the strategy they would use. Would they buy the stock(s) or not? Explain. Ask each group to report. Do students agree? Discuss their answers. Answers to Activity 2 1. Widget Manufacturing Company Strategy: Avoid obvious risk—specific stock situation Reasoning: Although the technology factor is important, the risk of losing the lawsuit is probably more important. 2. WonderWalkers Strategy: Peter Lynch—Buy what you know; markets Reasoning: Recognize a good product before everyone else; early phase of development means markets could expand and sales could grow rapidly. 3. GM Strategy: Economic Cycle—Good times and Cyclical stocks Reasoning: During periods of expansion, automobile stocks, which are cyclical, are more likely to show greater growth than defensive stocks. People are more confident about the present and future so they are more willing to make a large expenditure. 4. Kellogg’s, Wisconsin Valley Electric Company, GM Strategy: Economic Cycle—Not so good times and Defensive stocks. Reasoning: During periods of recession, Kellogg’s and Wisconsin Valley Electric Company, both defensive stocks, generally decline less than other stocks. However, GM, a cyclical stock, would be likely to decline more than stocks in other industries. G. Summarize Activity 2. Explain that when you select a stock you are making a reasoned judgment, using information you deem important to maximize the benefit and minimize the cost. Since you have limited funds to invest in The Stock Market Game, you must choose and give up your next best alternative. This is the opportunity cost. H. In the next Activity, students will search for stocks using newspaper stock tables, a brandname index, and a parent-company index. Tell students that they will search for the names of companies that make many of their favorite products. This search is necessary because if you can’t find the listing in the stock market table, you can’t buy the stock. I. Distribute copies of Activity 3, A seemingly Simple Search for Selected Stocks, Activity 4, Brand Name and Parent Company Index, and Activity 5, Stock Search Activity Sheet. Ask the students to read Activity 3 aloud. As a group, read and discuss directions 1, 2, and 3, perhaps doing a few of the tasks as examples. J. Students might be unable to find particular stocks in the newspaper. For example, RJR Nabisco was purchased by Kohlberg Kravis Roberts & Co., so the stock of RJR Nabisco is not publicly traded. Consequently, students will not find RJR Nabisco in the stock tables if they begin with a popular product, such as Oreo cookies or Ritz crackers, which is made by Nabisco Brands, which is now part of KKR. The stocks of Pillsbury Company are no longer traded because the business was purchased by the British company, Grand. Metropolitan. Other companies may not be publicly traded, so their stocks, too, will not be listed. And some, like Nintendo, are foreign companies whose stocks are not traded in U.S. stock markets. Finally, the list of companies in Activities 4 and 5 might require periodic updating, for particular companies might be purchased by other businesses in the same way RJR Nabisco was purchased by KKR. CLOSURE Ask students to look in their kitchen cabinets at home. Boxes of cereal or cans of vegetables will give the company name and sometimes the parent company. For example, Nabisco Shredded Wheat is now one of the Post cereals, which is owned by Kraft, which is owned by General Foods, which is owned by Philip Morris. Often companies furnish 800 numbers on their products, so students can call to ask about parent companies. Ask students to add to the Brand Name and Parent Company index when new connections are discovered. ASSESSMENT Multiple Choice Questions 1. A business that owns or controls another company is a(n) _______ company. a. brand name b. parent c. subsidiary d. industry 2. Individuals selecting stock would need to consider a. economic cycle. b. markets available. c. technological changes. d. current industry conditions. e. all of these. ESSAY - Your friend asks you for your opinion on buying American Manufacturing Limited stock. What information would you need to know before you could give a reasoned answer? Explain. (You need to know what the company does and whether it makes good products/services. How is the company doing? How is the industry doing? What are its current and future markets? What is the financial position of the company? What is the company debt [assets to liabilities ratio], earnings growth over the past five years, high and low prices for the year [stock tables], and dividend payments? Is it in the early or late phase of development? Are new developments in progress? What other businesses does the company own? Is there diversity in the products they make? This information would help you determine the financial condition of the company, its markets, and potential growth.) - What choices about daily expenditures and stock purchases do you think your parents, neighbors, employers, and so on, would make depending on the economic cycle? For example, if the economy went into recession, would they continue to buy bread and milk? How about a new car? To learn more about this, prepare a set of questions and interview several adults. Be sure you clearly differentiate between economic expansion and economic recession. Record people’s answers and the reasons they give. Then write a report explaining the impact of the economic cycle on consumer and stock purchase decisions. Use your data for examples. JOURNAL - Choose an industry. Collect information about the industry from the newspaper financial pages, magazines such as Business Week, and television programs such as Wall Street Week and Nightly Business Report. Record the date and source for each item of information. Write a report describing the industry, its products, companies in the industry (successful and other), changes taking place—technological and political, domestic and global—and the probable future of this industry. STOCK SEARCH ACTIVITY SHEET 1. Aunt Jemima: The Quaker Oats Company. Quaker Oats. 2. Band-Aid: Johnson & Johnson. JohnsJohns. 3. Betty Crocker: General Mills, Inc. GenMills. 4. Bisquick: General Mills, Inc. GenMills. 5. Cheerios: General Mills, Inc. GenMills. 6. Comet: Procter & Gamble Company. ProctGam. 7. Coppertone: The Coppertone Corporation, which is a part of Schering-Plough Corporation. ScheringPl. 8. Crest: Procter & Gamble Company. ProctGam. 9. Disney: The Walt Disney Company. Disney. 10. Eveready: Eveready Battery Company, Inc., which is a part of Ralston Purina Company. RalstonPur. 11. Ford Motor Company. The Ford Motor Company. FordMotor. 12. Fritos: The Frito-Lay Company, which is a part of PepsiCo. PepsiCo. 13. Ivory: Procter & Gamble Company. ProctGam. 14. Jell-O: General Foods Corporation, which is a part of Philip Morris Companies, Inc. PhilipMor. 15. Jif: Procter & Gamble Company. ProctGam. 16. Juicy Fruit: The Wm. Wrigley Jr. Company. Wrigley. 17. Kentucky Fried Chicken: Kentucky Fried Chicken Corporation, which is a part of PepsiCo. PepsiCo. 18. Kool-Aid: General Foods Corporation, which is a part of Philip Morris Companies, Inc. PhilipMor. 19. L. A. Gear: L. A. Gear, Inc. LAGear. 20. McDonald’s: McDonald’s Corporation. McDonalds. 21. Minute Maid: The Coca-Cola company. CocaCola. 22. Pepperidge Farm: Pepperidge Farm Inc., which is a part of Campbell Soup Company. CamblSoup. 23. Pepsi-Cola: PepsiCo. PepsiCo. 24. Pizza Hut: Pizza Hut, Inc., which is a part of PepsiCo. PepsiCo. 25. Polaroid: Polaroid Corporation. Polaroid. 26. Reebok: Reebok International. Reebok. 27. Raisin Bran: The Kellogg Company. Kellogg. 28. Sony: Sony Corporation. Sony Cp. 29. Star-Kist: Star-Kist Foods, which is a part of H. J. Heinz Company. Heinz. 30. Taco Bell: Taco Bell, Inc., which is a part of PepsiCo. PepsiCo. 31. Tender Vittles: Ralston Purina Company. RalstonPur. 32. Trident: American Chicle Company, which is a part of Warner-Lambert Co. WarnerLam. 33. Tylenol: McNeil Consumer Products Company, which is a part of Johnson & Johnson. JohnsJohns. 34. Valvoline: Valvoline Oil Company, which is a part of Ashland Oil Company. Ashland Oil. 35. Ziploc: Dow Chemical Company. DowChem. Wombat, Inc., Makes a Product That… •Everyone needs •No one has •Is used daily •Cannot be duplicated •Will be needed in the future •Costs little to produce and ship •Doesn’t need to advertise •Will enjoy a growth rate of 50% per year for the next ten years •Never had a down year in its 100-year history STRATEGIES FOR STOCK SELECTION—SUMMARY 1. Peter Lynch: Go with what you know (after some research) “During a lifetime of buying cars or cameras, you develop a sense of what’s good, what’s bad, what sells, and what doesn’t... and... you know it before Wall Street knows it.” 2. Markets: Current and Future A project must have customers today and even more tomorrow or it isn’t growing. Phase of Development—Early or Late? Global Markets—Can the product/service be sold overseas? Demographics—Will a large percentage of the population want this product? 3. Economic Cycle: Is the economy expanding or slowing? The performance of many stocks will be affected by economic cycles. Good times: Most people who want to work are employed. People and businesses are spending money. Not so good times: More people than usual are out of work or worried about being out of work. People and businesses are not buying as much. Defensive industries: Even in difficult times, people use toothpaste, eat food, and use electricity. Cyclical stocks: High-priced consumer goods like cars, appliances, new houses Raw materials like aluminum, steel, and cement 4. Avoid Obvious Risks Front page companies and this year’s winners Current industry condition Changes in technology Specific stock situation 5. Selecting Stock for The Stock Market Game Very Short Term Growth Stocks—Small companies, newer companies, Stocks listed on the Nasdaq Stock Market see: http://naija-currentnews.blogspot.com