Posted by Robert on April 9, 2012
I recently volunteered to participate with Junior Achievement to teach financial literacy in schools. A couple months ago, I helped teach an introductory class to a group of grade 7 students. I think they felt it was like drinking from a firehose. I’m sure that three hours is not really enough to internalize the financial principles that help people make successful decisions in life, but it’s certainly better than not teaching anything.
This past week, I spent an hour with a grade 9 business class, and really enjoyed it. The program is called Investment Strategies Program, and it includes a stock market simulation. I will visit the class four times (for an hour each), and between the third and fourth lesson, the students will participate in a six week stock market challenge.
I was concerned about whether or not this program would be relevant to them. How many 15 year olds have any experience investing in the stock market? At this age, they probably don’t even have enough savings to warrant buying a stock. But because it was a business class, it made sense to talk about raising funds for a business, sharing ownership, sharing profit and lead into dividends and primary and secondary markets for shares. For those who are unsure, the primary market is when a company raises money by selling new shares, and the secondary market is where shareholders buy and sell shares from each other (without affecting the capital of the company). Primary and secondary trades all take place on the stock exchange.
We talked briefly about valuing a company. Only briefly, though, because there are no hard-and-fast rules. The important concept was the P/E ratio, or the relationship between the earnings of the company, and the price an investor is willing to pay for those shares. Shares in a stable company might be worth 12 times its earnings (a 12-year payback), whereas a smaller, riskier company might be worth only 8 times its earnings. But what if those earnings are growing quickly, like Apple (AAPL)? The kids were 2 years old in 1999-2000, so I briefly described the tech bubble and crash. They could relate much better to the crash of 2008 (although the cause wasn’t the same).
Finally, I showed them how to look up a company on Google Finance. It’s not the only tool, but it’s very usable. I showed that Apple has fewer shares outstanding than Bombardier (an example in the JA materials), but a higher share price. We compared the market cap, to further solidify the idea that a stock is a share of a company, and the number of ways the pie is sliced doesn’t affect the size of the pie. As such, the dollar value of a share means very little.
In future lessons, we’ll explore how to filter and choose stocks for investment, and then pretend to gamble in the market to find out who can make the most money in six weeks. I’m skeptical the kids can learn about long-term investing by playing the market for six weeks, but I think the first lesson offered some useful ideas about the world of business. What do you think? Should all students learn about how business are funded and why that presents opportunities for investment? At what age?
As an aside, I pointed out that financial math is relatively simple. Their teacher thought it was a good idea to point out that they’ll probably never use any high school math after they finish school. In my case, that’s mostly been true, but I don’t regret learning math. And some of these kids might become engineers. Bonus question: do you think requiring all students to learn high school math is wise?