4-H BUILD A MILLION CLUB LEADER S GUIDE

4-H BUILD A MILLION CLUB LEADER S GUIDE LEADER S GUIDE UNIT 3: Investment Basics Lesson 8: Cash and Cash Equivalents Lesson 9: Understanding and Investing in the Stock Market Lesson 10: Bonds Basics Lesson 11: Understanding Mutual Funds

LESSON 8: Cash and Cash Equivalents Learning objectives: The purposes of this lesson are to: Familiarize youth with various cash and cash equivalent accounts available at their local financial institutions. Provide youth with practice calculating returns and making investment choices based on goals and timelines. Time: 60 minutes Materials needed: Pencils Access to the Internet Can You Relate? icebreaker, one for each participant Glossary of Key Concepts, one for each participant Cash and Cash Equivalent Key Concepts, one for each participant Best Choice Work Sheet, one for each participant Optional additional resources: Local financial institutions Web sites Lesson plan overview Time Task 5 minutes Welcome and roll call 20 minutes Icebreaker: find youth in the group that can reply yes to the questions on the Can You Relate? icebreaker. If youth are unclear of certain concepts or terms, make a note of that, and review those terms as a class (using flip chart/markers). You can use the Instructor Key Concepts Cash and Cash Equivalents as a guide for your discussion. Participants can receive the Glossary of Key Concepts as a guide. 20 minutes Provide each youth with a copy of the Best Choice Work Sheet and review it so that youth are aware of the information needed. Have the youth work in small groups and read the case studies and complete the chart. Allow participants to access the Internet or to review the newspapers to find the available rates. If no newspaper or Internet access is available, the instructor can look up rates at a local institution ahead of time and provide this to the participants. Provide sufficient time for participants to complete the work sheet and make the best choice for each character. 10 minutes Have youth share what they found in their research. 5 minutes Discussion questions 75

Instructor Key Concepts: Cash and Cash Equivalents Language below referenced from the Investor Education Module Series, FINRA Investor Education Foundation. It may seem simple to include in an investing course talk about cash, but that s really where it all begins. The dictionary defines cash as ready money. Cash can be money that is ready to buy things, or it can be money that is ready to go to work earning more money. Types of financial institutions: The two most common types of financial institutions where you can keep your money safe are banks and credit unions. A bank is a for-profit financial institution where consumers can utilize services such as checking and savings accounts, credit cards, safe deposit boxes and loans. A credit union is a democratically owned and controlled not-for-profit cooperative which offers services similar to a bank. Are deposits in banks and credit unions financially insured? The Federal Deposit Insurance Corporation (FDIC) is a federal agency that insures bank deposits up to $100,000. Investments purchased at banks are not FDIC-insured. Deposits in credit unions are insured to $100,000 by the National Credit Union Share Insurance Fund (NCUSIF), which is administered by the National Credit Union Administration (NCUA). What types of accounts can you have at banks/ credit unions? Traditional checking accounts at banks and share draft accounts at credit unions are called demand deposit accounts because you can demand or withdraw your money anytime. That s one of the reasons they are so popular people like being able to get their hands on their cash. Traditional checking accounts don t usually pay interest, and the interest you can earn on a traditional savings account is usually much less than interest earned on other safe savings tools such as certificates of deposit (CDs), money market accounts or Treasury bills. These cash equivalent accounts are said to be somewhat liquid because you can easily turn them into cash. CDs and Treasury bills are debt instruments. 76 This means you are loaning your money to either the bank or the government, and when the loan matures or comes due, you are paid back the principal (what you loaned) plus interest. A certificate of deposit (CD), also known as a time deposit, is a short- or mid-term debt instrument offered by banks. CDs pay a higher interest rate than most savings accounts in exchange for your agreement not to withdraw the money for a specified length of time. The longer the duration of the CD, the higher the interest rate will be. However, there is a substantial penalty for money taken out early before the maturity date of the CD, so it is best not to commit to a CD if there is a chance you might need the money before the time period is over. Certificates of deposit, which are insured by the FDIC at a bank and the NCUSIF at a credit union, are considered low-risk, low-return investments. A money market account is like a regular savings account offered by banks and share draft accounts at credit unions but with a few differences. First, money market accounts usually pay a higher interest rate. They also require that you keep a higher minimum balance (sometimes $1,000 or more) in your account. Money market accounts also restrict how often you can withdraw money. These accounts invest your money in other short-term debt instruments such as Treasury bills or certificates of deposit. Fees are similar to those charged for regular checking accounts with the exception that you might be charged an extra fee if your balance drops below the minimum requirement or you have excess withdrawals. Treasury bills, also called T-bills or U.S. Treasury bills, are negotiable debt obligations issued by the U.S. government and are backed by the full faith and credit of the federal government. Treasury bills are short-term, usually one year or less, and are exempt from state and local taxes. Treasury bills are available with maturities of 13, 26 or 52 weeks. They are purchased at a discount to their $10,000 face value, and the full amount is received at maturity. References: Information cited and adapted from the FINRA Investor Education Foundation Investor Education Modules. Available at http://www.finrafoundation.org/resources/ education/modules/

HANDOUT: Glossary of Key Concepts: Cash and Cash Equivalents Types of financial institutions: Banks and credit unions are the two most common types of financial institutions where you can keep your money safe. A bank is a for-profit financial institution where consumers can utilize services such as checking and savings accounts, credit cards, safe deposit boxes and loans. A credit union is a democratically owned and controlled not-for-profit cooperative which offers services similar to a bank. Are deposits in banks and credit unions financially insured? The Federal Deposit Insurance Corporation (FDIC) is a federal agency that insures bank deposits up to $100,000. Investments purchased at banks are not FDIC-insured. Deposits in credit unions are insured to $100,000 by the National Credit Union Share Insurance Fund (NCUSIF), which is administered by the National Credit Union Administration (NCUA). What types of accounts can you have at banks/ credit unions? Traditional checking accounts at banks and share draft accounts at credit unions are called demand deposit accounts because you can demand or withdraw your money at any time. That s one of the reasons they are so popular people like being able to get their hands on their cash. Traditional checking accounts don t usually pay interest, and the interest you can earn on a traditional savings account is usually much less than interest earned on other safe savings tools such as certificates of deposit (CDs), money market accounts or Treasury bills. These cash equivalent accounts are said to be somewhat liquid because you can easily turn them into cash. CDs and Treasury bills are debt instruments. This means you are loaning your money to either the bank or the government, and when the loan matures or comes due, you are paid back the principal (what you loaned) plus interest. by banks. CDs pay a higher interest rate than most savings accounts in exchange for your agreement not to withdraw the money for a specified length of time. The longer the duration of the CD, the higher the interest rate will be. However, there is a substantial penalty for money taken out early before the maturity date of the CD, so it is best not to commit to a CD if there is a chance you might need the money before the time period is over. Certificates of deposit, which are insured by the FDIC at a bank and the NCUSIF at a credit union, are considered low-risk, low-return investments. A money market account is like a regular savings account offered by banks and share draft accounts at credit unions but with a few differences. First, money market accounts usually pay a higher interest rate. They also require that you keep a higher minimum balance (sometimes $1,000 or more) in your account. Money market accounts also restrict how often you can withdraw money. These accounts invest your money in other short-term debt instruments such as Treasury bills or certificates of deposit. Fees are similar to those charged for regular checking accounts with the exception that you might be charged an extra fee if your balance drops below the minimum requirement or you have excess withdrawals. Treasury bills, also called T-bills or U.S. Treasury bills, are negotiable debt obligations issued by the U.S. government and are backed by the full faith and credit of the federal government. Treasury bills are short-term, usually one year or less, and are exempt from state and local taxes. Treasury bills are available with maturities of 13, 26 or 52 weeks. They are purchased at a discount to their $10,000 face value, and the full amount is received at maturity. References: Information cited and adapted from the FINRA Investor Education Foundation Investor Education Modules. http://www.finrafoundation.org/resources/ education/modules/ A certificate of deposit (CD), also known as a time deposit, is a short- or mid-term debt instrument offered 77

ICEBREAKER: Can You Relate? Directions: Travel around the room and find youth that can reply yes to each of the statements in the box below. Each youth must respond to at least one of the statements below. I have a checking account One advantage of a savings account is I own a certificate of deposit One disadvantage of a certificate of deposit is I am a member of a credit union I am a customer of a bank I know what my current interest rate is I can explain the difference between a savings account and a checking account I can define what a Treasury bill is One disadvantage of a savings account is I know what interest is I can define what a certificate of deposit is I hold money in a money market account One advantage of a checking account is One advantage of a money market account is One disadvantage of a checking account is One advantage of a certificate of deposit is One disadvantage of a money market account is One disadvantage of a certificate of deposit is I have a savings account 78

ACTIVITY: Cash and Cash Equivalents Materials needed: Internet access Cash and Cash Equivalent Case Studies handout, one for each youth Best Choice Work Sheet, one for each youth The business or financial section of the local newspaper, enough for each youth to have a section Directions: 1. Have the youth read the case studies. 2. Using the business section of your local newspaper or a local bank and/or credit union s Web site, research what types of account would be the best savings vehicle for Janelle, Zane, Laurel and Evan s short-term goals. 3. Record your decisions on the Best Choice Work sheet. 79

HANDOUT: Cash Equivalent Case Studies Janelle, Zane, Laurel and Evan have some decisions to make. They each know how they want to use the money that they have and the money they are earning. It is tempting to go out and spend the money on something fun, but they each realize that they have to make smart choices if they are going to reach their individual goals. How could Janelle, Zane, Laurel and Evan make use of these savings choices to help him/her maximize his/her money? In each case study, which investment would be the best? Consider the characteristics of each type of cash equivalent account and determine which would be the best for each situation. Case Study 1: Janelle For Christmas, Janelle s grandmother gave her $100. She didn t get the new snowboard she had asked for, so she has decided that for this snow season, she is going to use the same snowboard she used last year. She has decided to save the money her grandmother gave her and put it toward the new snowboard she plans to purchase next fall. She babysits for the neighbor approximately once a month and earns an average of $25 each time. She has nine months to save, and she wants to be able to add her babysitting money to her snowboard account. What specific characteristics of an account are most important in Janelle s situation? Which cash equivalent account is best for Janelle? Case Study 2: Evan For the chores he does at home, Evan gets $15 per week for his allowance. He wants easy access to his money, but he doesn t want his older sister to be able to get into his stash when she needs money. What specific characteristics of an account are most important in Evan s situation? Which cash equivalent account is best for Evan? Case Study 3: Laurel Laurel s grandmother just passed away and left each of the grandchildren $1,000. Laurel has never had that much money in her life, and she is excited about what she can do with it! She would love to buy herself a guitar. But she remembers that her grandmother always talked about her going to college, so, in honor of her grandmother, she wants to set aside a portion of the money for her education. She figures she can buy a nice used guitar on ebay for $150. She wants the rest of the money to earn interest for the five years until she graduates. What specific characteristics of an account are most important in Laurel s situation? Which cash equivalent account is best for Laurel? Case Study 4: Zane Zane s family is going on vacation next summer, and his mom told each of the kids that over the next 10 months, they have to raise their own spending money for the trip. So Zane took a stack of video games that he no longer plays with and put an ad (the ad is free for kids!) in the newspaper to sell them. He made $117. He figures that is plenty of money for the vacation, so he s not planning to earn more. But he wants to put the money somewhere where he won t be tempted to spend it and where it will earn some interest. What specific characteristics of an account are most important in Zane s situation? Which cash equivalent account is best for Zane? 80

HANDOUT: Best Choice Work Sheet Name of the individual Length of time to save Main objective Amount of cash Current interest rates: Savings account rate Certificate of deposit rate Money market rate Features of the accounts (minimum balances, time limitations, etc.): Savings account Certificate of deposit Money market What is the best choice and why? 81

Discussion Questions: In looking at the case study examples, why did you choose one financial investment product over another? What was the deciding factor for your choice? When would these types of savings options be a smart choice for an investment product? What advantages does this type of saving option certificate of deposit, savings account, etc. bring to your financial portfolio? 82

LESSON 9: Understanding and Investing in the Stock Market Learning objectives: The purposes of this lesson are to: Provide youth with a basic understanding of the stock market. Familiarize youth with the general terminology associated with stocks, types of stocks and the stock market. Familiarize youth with the process of buying and selling stocks. Time: 120 minutes (at minimum a twosession lesson) Materials needed: Pencils Computer/projector Find Your Match icebreaker definition and term cards Quick Overview: Classes of Stock handout, one for each youth Quick Overview: 411 on Stocks handout, one for each youth Important Stock Terms handout, one for each youth Copies of the financial page of the newspaper or computer access (see Optional additional resources below for Web sites to review) Investigating the Stock Market handout, one copy per youth Jeopardy Questions, instructor only Game board overhead/poster Potential responses for Jeopardy game (posted on a wall/ whiteboard or as handout given out to each participant) Prizes for Stock Market Jeopardy, if available Optional additional resources: www.nasdaq.com www.nyse.com Lesson plan overview Time Task 5 minutes Welcome and roll call 20 minutes Icebreaker: Find Your Match and sharing of activity 30 minutes Review of the quick overviews Classes of Stock and 411 on Stocks, and Important Stock Terms. Instructors may use the information in the instructor key concepts as a guide for this discussion. 30 minutes Investigating the Stock Market activity 10 minutes Have groups present their findings from the Investigating the Stock Market activity 20 minutes Stock Market Jeopardy 5 minutes Discussion questions Instructor Key Concepts: Stocks and the Stock Market Language below referenced from the Investor Education Module Series, FINRA Investor Education Foundation. Introduction When you invest, you buy something that you expect will grow in value and provide a profit, either in the short term or over an extended period. You can choose among a variety of investments, such as art and real estate. For financial investments, most people concentrate on three types: stocks, bonds and cash equivalents. You can invest in these directly or through mutual funds. Many financial investments including stocks, bonds and mutual funds are legally considered to be securities under the federal securities laws. Securities tend to be widely available, easily bought and sold, and subject to federal, state and private-sector regulation. However, investing in securities carries certain risks. That s because the value of your investment changes as the market price of the security changes in response to investor demand. As a result, you can make money, but you can also lose some or all of your original investment. 83

Important stock terms Capital When corporations want to raise money to expand their businesses or provide additional services, they may issue (or offer) stocks, bonds, or both stocks and bonds for public sale. Stocks Stocks represent an ownership position in a company. Stocks are referred to as equity investments. Initial public offering (IPO) When a company sells stock for the first time, it is called an initial public offering, or IPO. The market where IPOs are sold is referred to as the primary market. A company may also make a secondary or follow-up offering to sell additional shares of its stock to the public. Once these public offerings take place, the capital raising is complete, and the stocks and bonds trade in their respective secondary markets. The issuing organization does not receive any additional money from secondary transactions. Public offerings in the United States must comply with the federal securities laws and the rules of the Securities and Exchange Commission (SEC). In addition, additional state laws often apply to public offerings, as well as rules imposed by the market in which the offering ultimately trades. Secondary market Where stocks are sold between investors. The company does not make any money on these sales. Examples of secondary markets are the New York Stock Exchange (NYSE), The American Stock Exchange (AMEX) and the NASDAQ Stock Exchange (NASDAQ). Return on investment The money you get back in relationship to what you put in depends on the success or failure of that company. If the company does well and makes money from the products or services it sells, you expect to benefit from that success. There are two main ways to make money with stocks: 1. Dividends When publicly owned companies are profitable, they can choose to distribute some of those earnings to shareholders by paying a dividend. You can either take the dividends in cash or reinvest them to purchase more shares in the company. 2. Capital gains Stocks are bought and sold constantly throughout each trading day on secondary markets, and their prices change all the time. When a stock price goes higher than what you paid to buy it, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you ve incurred a capital loss. Both dividends and capital gains depend on the fortunes of the company dividends as a result of the company s earnings and capital gains based on investor demand for the stock. Demand normally reflects the prospects for the company s future performance. Strong demand the result of many investors wanting to buy a particular stock tends to push the stock s share price upward. On the other hand, if the company isn t profitable or if investors are selling rather than buying its stock, your shares may be worth less than you paid for them. Types of stock You can buy two kinds of stock: 1. Common stock All publicly traded companies issue common stock. If you hold common stock, you re in a position to share in the company s success or feel the lack of it. The share price rises and falls all the time sometimes by just a few cents and sometimes by several dollars reflecting investor demand and the state of the markets. There are no price ceilings, so it s possible for shares to double or triple or more over time though they could also lose value. The issuing company may pay dividends, but it isn t required to do so. If it does, the amount of the dividend isn t guaranteed, and it could be cut or eliminated altogether, though companies may be reluctant to do either if they believe it will send a bad message about the company s financial health. 2. Preferred stock Some companies also issue preferred stock, which exposes you to somewhat less risk of losing money but also provides less potential for total return. Your total return includes any income you receive from an investment plus any change in its value. Holders of preferred stock are usually guaranteed a dividend payment, and their dividends are always paid out before dividends on common stock. So if you re investing mostly for income in this case, dividends preferred stock may be attractive. But, unlike common stock dividends, which may increase if the company s profit rises, preferred dividends are fixed. In addition, the price of preferred stock doesn t move as much as common stock prices. This means that, though preferred stock doesn t lose much value even during 84

a downturn in the stock market, it doesn t increase much either, even if the price of the common stock soars. So if you re looking for capital gains, owning preferred stock may limit your potential profit. Another point of difference between common stock and preferred stock has to do with what happens if the company fails. In that event, there s a priority list for a company s obligations, and obligations to preferred stockholders must be met before those to common stockholders. On the other hand, preferred stockholders are lower on the list of investors to be reimbursed than bondholders are. Categories of stock There are many categories of stock. Each category has different features as well as different levels of risk and return. Blue chip stock is the stock of a well-established, usually large company that has a long history of earnings, growth and dividend payments. Blue chip stocks generally carry less risk than the stocks of smaller companies. Growth stock is the stock of a company whose earnings are growing faster than the rate of general business activity. Growth stocks don t usually pay dividends because the managers would rather reinvest earnings back into the company. Growth stocks are often associated with a rapidly growing new industry, such as new technology. Income stock is the stock of a well-established company that is relatively mature. The company pays out a good part of its earnings as dividends. These companies grow more slowly than growth stocks. Investors who are interested in receiving income now instead of investing only for future growth might purchase income stocks. Foreign or international stock is the stock of a company outside the United States. Investing in foreign stocks is one way to diversify your portfolio. One of the risks you face with this type of investment is currency risk effects on return on your investment because of changes in the value of foreign money relative to American money (called the exchange rate). Small company stock (called small caps ) is the stock of a relatively small company with market value of its outstanding shares (called market capitalization) between $300 million and $2 billion. Small-cap stocks have the potential for big gains but also have a higher risk of the company failing or being poorly managed than mid- or large-cap stocks. Medium-sized company stock ( mid caps ) is the stock of a medium-sized company with market capitalization between $2 billion and $10 billion. Mid-caps have a greater potential for growth than larger companies but carry less risk than small companies. Large company stock ( large caps ) is the stock of a large company with market capitalization of $10 billion or more. The price of large-cap stock is usually higher than that of mid- or small-cap stocks because of the lower risk. Large-caps usually pay dividends and don t always have potential for growth. Value stock is a stock with share prices that are inexpensive compared with their current earnings. Stock performance The performance of an individual stock is also affected by what s happening in the stock market in general, which is in turn affected by the economy as a whole. For example, if interest rates go up and you think you can make more money with bonds than you can with stock, you might sell off stock and use that money to buy bonds. If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits, also influence market performance. However and this is an important element of investing at a certain point, stock prices will drop low enough to attract investors again. If you and others begin to buy, stock prices tend to rise, offering the potential for making a profit. That expectation may breathe new life into the stock market as more people invest. Cyclical pattern The pattern of strength and weakness in the stock market and the majority of stocks that trade in the stock market recurs continually, though the schedule isn t predictable. Sometimes, the market moves from strength to weakness and back to strength in only a few months. Other times, this movement, which is known as a full market cycle, takes years. 85

Stock volatility If you ve seen the jagged lines on charts tracking stock prices, you know that prices fluctuate throughout the day, week, month and year as demand goes up and down in the markets. You ll see short-term fluctuations as a stock s price moves within a certain price range, and longer term trends over months and years, in which that shortterm price range itself moves up or down. The size and frequency of these short-term fluctuations are known as the stock s volatility. Stock splits When a stock price gets very high, companies may decide to split the stock to bring its price down. One reason to do this is that a very high stock price can intimidate investors, who fear there is little room for growth. Evaluating a stock When you buy a stock, you re buying part ownership of a company, so the questions to ask as you select among the stocks you re considering are the same questions you d ask if you were buying the whole company: What are the company s products? Are they in demand and of high quality? Is the industry as a whole doing well? How has the company performed in the past? Are talented, experienced managers in charge? Are operating costs low or too high? Is the company in heavy debt? What obstacles and challenges does the company face? Is the stock worth the current price? A common and quick way to compare the value of various stocks is to look at the stock s earnings. All publicly traded companies report earnings to the Securities and Exchange Commission. If you check those reports, the company s annual report or its Web site, you ll find its current earnings per share, or EPS. That ratio is calculated by dividing the company s total earnings by the number of shares. Company s total earnings / number of shares = earnings per share (EPS) You can divide the current price of a stock by its EPS to get the price-to-earnings ratio, or P/E multiple, the most commonly quoted measure of stock value. In a nutshell, P/E tells you how much investors are paying for a dollar of a company s earnings. For example, if Company A has a P/E of 25 and Company B has a P/E of 20; investors are paying more for each dollar earned by Company A than for each dollar earned by Company B. Current price of a stock / EPS = price-to-earnings ratio Buying and selling stock To buy and sell stock, you usually need to have an account either at a brokerage firm and give orders to a stockbroker at the firm who will execute those instructions on your behalf, or online, where the firm s technology systems route your order to the appropriate market or system for execution. The kind of firm you use will determine how you convey your orders, what types of services you have access to and what fees you pay to trade your stocks. In general, the more services the firm offers, the more you ll pay for each transaction. There are ways to buy stock directly through certain companies without using a broker. Contacting a stock professional can help you determine the best ways for you to purchase stocks. References: Information cited and adapted from the FINRA Investor Education Foundation Investor Education Modules. Available at http://www.finrafoundation. org/resources/education/modules/. 86

ICEBREAKER: Find Your Match Materials needed: Definition and term cards Flip chart paper Markers Glue Directions: 1. Copy puzzle pieces on card stock paper and cut across puzzle piece lines. 2. Give each youth a piece of a puzzle and ask him/her to find its match (matching a term to a definition). 3. Youth will create a poster that explains the term that their duo has. 4. Youth will present their posters to the rest of the participants. 5. As a group, the youth will create a puzzle using their individual puzzle pieces. The puzzle will be the form of a square piece of paper. 87

HANDOUT: Stock An invitation by investors to buy an ownership position in a company V o l a t i l i t y This refers to the size and frequency of the short term fluctuations of the stock market Equity shares When a stock price goes higher than what you bought it for, you can sell your shares for a profit Capital loss When you invest in stock, you buy these ownership shares in a company Capital gains When you sell your stock for a lower price than you paid for it, you have incurred this type of loss 88

HANDOUT: Quick Overview: Categories of Stock There are many categories of stock. Each class has different features as well as different levels of risk and return. Blue chip stock is the stock of a well-established, usually large company that has a long history of earnings, growth and dividend payments. Blue chip stocks generally carry less risk than the stocks of smaller companies. Growth stock is the stock of a company whose earnings are growing faster than the rate of general business activity. Growth stocks don t usually pay dividends because the company would rather reinvest earnings back into the company. Growth stocks are often associated with a rapidly growing new industry, such as new technology. Income stock is the stock of a well-established company that is relatively mature. The company pays out a good part of its earnings as dividends. These companies grow more slowly than growth stocks. Investors who are interested in receiving income now instead of investing only for future growth might purchase income stocks. Foreign or international stock is the stock of a company outside the United States. Investing in foreign stocks is one way to diversify your portfolio. One of the risks you face with this type of investment is currency risk effects on the return on your investment because of changes in the value of foreign money relative to American money (called the exchange rate). Small company stock (called small caps ) is the stock of a relatively small company with market value of its outstanding shares (called market capitalization) between $300 million and $2 billion. Small-cap stocks have the potential for big gains but also have a higher risk of the company failing or being poorly managed than mid- or large-cap stocks. Medium-sized company stock ( mid caps ) is the stock of a medium-sized company with market capitalization between $2 billion and $10 billion. Mid-caps have a greater potential for growth than stocks of larger companies but carry less risk than that of small companies. Large company stock ( large caps ) is the stock of a large company with market capitalization of $10 billion or more. The price of large-cap stock is usually higher than that of mid- or small-cap stocks because of the lower risk. Large-caps usually pay dividends and don t always have the potential for growth. Value stock is stock with share prices that are inexpensive compared with their current earnings. 89

HANDOUT: Quick Overview: 411 on Stocks A share of stock is an ownership share in a company. Shareholders, as owners of a company, generally have voting rights but have no guarantee of income. Shareholders have no guarantee that the company will grow or even that it will survive. Just as the potential loss is your entire investment, your potential gain is also unlimited. Companies sell shares of stock in their businesses as a way of raising money to help their businesses grow. The first offering of stocks for sale by a company is called the initial public offering, or IPO. Having an IPO is referred to as going public. When a company does not have any publicly traded shares of its stock, it is a privately held business. Benefits of purchasing stocks As a stockholder, you have partial ownership of a company and the opportunity to grow your funds as a stock rises in price. However, stocks are a riskier investment than other types of investment options such as mutual funds or bonds, and if the price of the stock falls, the potential for growing your investment falls as well. Stocks are usually traded on special secondary marketplaces called stock markets or stock exchanges. The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ) are two such marketplaces. Stock markets serve as a marketplace where people who own shares of stock can sell shares to other people who may wish to buy them. At one time, information about the prices and quantities of stocks traded was transmitted on thin strips of paper called ticker tape. We still refer to this information as the ticker, even though we now use computers to transmit information. Each company has a ticker symbol, an abbreviation of one to four letters that identifies the company on the financial news. Individuals generally buy and sell stocks through a broker, either in person, on the phone or via the Internet. Unless you are participating in an IPO (which is very unlikely for a small individual investor), when you buy shares of a publicly traded company, you are buying that stock from another investor who already owns the stock, not from the company itself. When you buy shares of a stock, you hope the company will do well and that new investors will want to buy the stock at a later date. You profit from buying stocks that many people will want in the future. If the stock price goes up, or appreciates, you can sell your shares for more than you paid. This is one way to build wealth. The stock price, however, can also go down, and you could lose money. There is always a risk in investing in stocks. The company may also pay dividends to shareholders, which you receive as income. Dividends are distributions to stockholders in the form of cash or stock. Sometimes a public company will decide to split the stock. When a stock splits, you will have twice as many shares, but each share is now worth half as much. At the moment of the stock split, the total value of your investment does not change. Stock prices may be stable or very volatile because they are linked to changing company and economic conditions. Therefore, stock investing requires a great deal of attention. In the long run, it is difficult for an individual or even a professional money manager to consistently earn greater returns than market average. Because of this, it is often recommended that individuals consider investing in a diverse portfolio or a lowcost index fund, which is a fund that invests in the same stocks as a market index, such as the Standard & Poor s 500 (S&P 500). Stocks can be bought and sold through fullservice brokerage firms or a discount broker for a commission or a flat fee per trade. Stocks can also be evaluated online using popular Websites and accessing company information. Stocks can also be purchased through the Internet. 90

HANDOUT: Quick Overview: Important Stock Terms Common stock Dividends Earnings per share (EPS) Preferred stock Price-to-earnings ratio Ticker All publicly traded companies issue common stock. If you hold common stock, you re in a position to share in the company s success or feel the lack of it. When publicly owned companies are profitable, they can choose to distribute some of those earnings to shareholders by paying dividends. You can either take the dividends in cash or reinvest them to purchase more shares in the company. Calculated by dividing the company s total earnings by the number of shares. Some companies also issue preferred stock, which exposes you to somewhat less risk of losing money but also provides less potential for total return. Holders of preferred stock are usually guaranteed a dividend payment, and their dividends are always paid out before dividends on common stock. You can divide the current price of a stock by its EPS to get the price-to-earnings ratio, the most commonly quoted measure of stock value. P/E tells you how much investors are paying for a dollar of a company s earnings The symbol for the name of a company listed on the financial page 91

ACTIVITY: Investigating the Stock Market Materials needed: Investigating the Stock Market handout Computer access or copies of the financial page of the newspaper or access to quotes from Yahoo! Finance (http://finance.yahoo.com) or NASDAQ.com (http://nasdaq. com) Directions: 1. Youth will get into small groups and be randomly given a category of stock such as: Blue chip stock Growth stock Income stock Foreign or international stock Small company stock Medium company stock Large company stock Value stock 2. Youth will research a stock that matches the category that they have been given. Youth can use the NASDAQ or NYSE Web sites as a resource. 3. Each group of youth will need to answer the questions on the chart on the Investigating the Stock Market handout. 4. Once the research on the stock is completed, each group will need to prepare a 90-second pitch to the entire group showcasing the stock to the rest of the group. 5. Each group presents its pitch to the total group. Groups can use props such as posterboard or jingles in their pitches. 92

HANDOUT: Investigating the Stock Market Name of the stock Ticker name Is this a common or a preferred stock? What is the class of stock? What was the stock opening price? What was the stock closing price? What is the P/E ratio? What is the EPS? What is the dividend? Has this stock been stable or volatile in the market? Why did you choose to research this stock? Would this stock be a good investment right now? (Yes or no and why?) 93

ACTIVITY: Buying and Selling Stocks Materials needed: Jeopardy questions (instructor only) Game board overhead/poster Potential responses (posted on a wall/whiteboard or given as handout to each participant) Prizes, if available (possible prizes could be candy/snack, play money, etc.) Directions: 1. Divide youth participants into teams of three to five individuals. 2. The instructor will ask a question. The first group to raise their hands will be allowed to answer. If the answer is correct, that group will earn the allotted number of points. If it is incorrect, another group will be given an opportunity to answer the question. The group with the most points at the end of the game will be given a prize, if available. Stock Market Jeopardy Questions (Note to instructor: answers are in bold next to each question) Abbreviations and Symbols $100 The symbol for the name of a company listed on the financial page is still referred to as the Ticker $200 YTD is the abbreviation for what? Year to date $300 This is one of the primary stock exchanges NASDAQ $400 In a stock market listing, the term high refers to the Highest price traded that day Stock Terms $100 A share of stock represents Ownership of a company $200 The difference between today s price of a stock and yesterday s price is the Net change $300 What is the column that indicates the value of one share of a mutual fund? Net asset value $400 What can you use to compare one stock with another, or to compare the value of a single stock over time? P/E ratio This is How It s Done in the Stock Market $100 What page of the newspaper would you look for stock market information? Financial page $200 This occurs when a company decides to divide shares in such a way that each shareholder now holds twice as many shares as he had just before the change. Stock split $300 Holding many different stocks is one way to Diversify $400 When a privately held business decides to sell shares of stock to outsiders, it is said to Go public 94

HANDOUT: Stock Market Jeopardy Potential Answer Choices Highest price traded that day Financial page Highest price traded the last 52 weeks Net asset value Stock split Years of dividends Price-toearnings ratio Ticker Ownership of a company NASDAQ Diversify Symbol Net change Go public Yield Share of stock Year to date Market price 95

HANDOUT: Stock Market Jeopardy Game Board Abbreviations and Symbols Stock Terms This is How It s Done in the Stock Market $100 $100 $100 $200 $200 $200 $300 $300 $300 $400 $400 $400 96

Discussion Questions: Why would someone invest in the stock market? What advantages do stocks give you? If you wanted to purchase stock in the stock market, what steps would you take to make that happen? After learning more about the stock market, how confident do you feel about taking the plunge to invest with this type of investment? 97

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LESSON 10: Bond Basics Objectives: The purposes of this lesson are to: Provide youth with a basic understanding of bonds. Provide youth with an understanding of how market interest rates affect the selling price of bonds. Illustrate to youth a simple method of calculating the yield (rate of return) of bonds and the relationship between selling price and yield. Time: 60 minutes Materials needed: Pencils Computer/projector Internet access Bonds: True or False icebreaker and answer key True/false signs for icebreaker Bond Key Concepts and Terms handout, one for each youth How Changing Interest Rates Affect Bond Prices graphic Measuring the Rate of Return graphic Bond Work Sheet, one for each youth Calculators Flip chart/dry erase board, markers Additional optional resources: www.kiplinger.com/tools/ ( How will rate changes affect my bond s current value? and What price should I pay for a bond? calculators) Lesson plan overview Time Task 5 minutes Welcome and roll call 5 minutes Icebreaker: Bonds: True or False 10 minutes Review of the Quick Overview: Bonds and How Changing Interest Rates Affect Bond Prices. Instructors may use the information in the instructor key concepts as a guide for this discussion. 20 minutes Bond Work Sheet activity 10 minutes Online calculators activity (www.kiplinger.com) 5 minutes Discussion questions 5 minutes Repeat Bonds: True or False icebreaker Instructor Key Concepts: Bonds Language below referenced from the Investor Education Module Series, FINRA Investor Education Foundation. What is a bond? Bonds are debt investments. They represent a loan you make to an institution a corporation, government or government agency in exchange for interest payments during a specific term plus the repayment of your principal when the bond comes due. How a bond works Bonds invite investors to make loans in exchange for the promise of repayment in full plus a certain rate of interest for the use of the money. Federal, state and local governments may issue bonds if they want to raise money to pay for new projects or supplement their tax revenues to pay for day-to-day operations. Companies issue bonds to pay for equipment, buy real estate or raise money. Key characteristics of bonds Bonds are usually described on the basis of these key characteristics: Par value or face value: the amount you re lending and expect to be paid back. Term: the length of time until the bond matures. Maturity date: the date on which the principal is to be paid in full to you. Interest: the percentage of the loan amount the borrower will pay you for the use of your money over the term. 99

Making money with bonds You can make money with bonds in two ways: 1. Interest The interest payments from the bond normally provide you with a fixed source of income for the bond s term. In most cases, the rate is fixed at the time the bond is issued. The interest rate is determined by a number of factors, including the bond s term, current market rates and the creditworthiness of its issuer. 2. Capital gains You might also make a profit by selling a bond before maturity at a higher price than you paid for it. Types of bonds Several major categories of bonds are available in the bond marketplace. Corporate bonds are issued by companies to raise capital for their business activities. Municipal bonds, also known as munis, are issued by municipalities local governments at the state, county or city level either to supplement tax revenues or to pay for public projects, such as building a new hospital or maintaining roads or bridges. Agency bonds are issued by both government agencies and government-sponsored enterprises (GSEs), which are entities such as the Tennessee Valley Authority, a power utility owned by the federal government, that operate like corporations but have charters from the government to provide some public service. The largest GSEs in the United States include the Federal Home Loan Bank (FHLB), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Treasury securities, also known as Treasuries, are debt offerings from the U.S. Treasury Department. They re backed by the full faith and credit of the U.S. government and are considered to have essentially perfect credit. Treasuries come as short-term Treasury bills, mid-term Treasury notes and longterm Treasury bonds. Asset-backed securities are loans, accounts receivable or other assets that are securitized, or packaged into bond offerings, by investment banks and mortgage corporations. These securities make it possible for you to invest in these debt markets by buying the bonds while making the money you lend available to borrowers who want to finance their purchases. Credit risk Because bonds are loans, investing in bonds involves credit risk that is, the risk that the borrower won t pay you back as promised. Because of credit risk, whenever you lend money, you need to evaluate whether the borrower has the financial ability to make interest payments and repay your principal according to your agreement. Other things to take into account are how much debt the borrower already has, whether the borrower seems financially solid, and how the borrower has paid back debt in the past. You would find it difficult to gather sufficient information to gauge a bond issuer s credit risk on your own. Fortunately, several companies do this for you. The two most common examples of rating sources are Moody s (http://www. moodys.com/) and Standard and Poor s (http://www. standardandpoors.com/.) Coupon and yield Bond interest payments are also called the bond s coupon because, in the past, paper bond certificates came with coupons you cut off, or clipped, and exchanged for interest payments. Today you no longer need to turn in a coupon to collect your interest payments. They simply arrive on schedule, typically twice a year. Yield is a measure of how much an investment is paying per dollar invested, calculated by dividing the annual interest by the price. A bond with a higher yield is more profitable than a bond with a lower yield. The simplest yield calculation coupon yield is exactly the same as the bond s interest rate. amount the bond pays/year = coupon yield bond s par value You calculate coupon yield by dividing the amount the bond pays you per year by the bond s par value. For example, if par value were $1,000 and each year you received two coupon payments of $25 each, you would divide $50 (the year s total) by $1,000 to get a 5 percent coupon yield. Another way to evaluate a bond is by looking at the current yield, which you calculate by dividing the interest by the actual market price. 100