What is a Stock Market?

Lesson Description

    The students are introduced to the key characteristics of a market economy through a brief simulation and a discussion of several examples drawn from their own experiences. Then they learn about differences among the three major stock markets in the United States and place sample stocks in each of the three markets using this knowledge.

    Throughout  history societies have faced the fundamental economic questions of what to produce and for whom to produce it in a world of limited resources. In the second half of the twentieth century, two very different economic systems evolved in response to these questions. Command economies are directed by a centralized government and characterized by limited choices  on the part of buyers and sellers. Market economies are based on private enterprise and consumer and producer choice.

    For many people, the word market may be closely associated with an image of a place -- perhaps a local farmer's market. For economists, however, market need not refer to a physical place. Instead, a market may be constituted by any organization that allows buyers and sellers to communicate about and arrange for the exchange of goods, services or resources. Stock markets provide a mechanism whereby people who want to own shares of stock can buy from people who want to sell shares of stock.

    The three major stock markets in the United States are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the NASDAQ Stock Market. Although these markets differ from one another, especially in the kinds of stock traded and the mechanisms used for trading, all three are known as secondary markets. They are different from a primary market in which the company sells shares and receives money in an initial public offering (IPO).

Concepts

• Characteristics of a market
• Market
• Primary Market
• Secondary Market
• Stock Market

Objectives

Students will:

1. List and describe the key characteristics of a market economy.
2. Describe the stock market as an example of a market.
3. Differentiate among the three major stock markets and predict on which market certain stocks might be listed.

Time Required

45 - 60 minutes

Materials

• 2 candy bars
• A transparency of Visual 1 and Visual 2
• A copy of Activity 1, Activity 2, and Activity 3 for each student
• 6-8 newspapers with recent stock market reports (e.g., USA Today, The Wall Street Journal)

Procedure

1. Display two candy bars. Ask: How many students would like to have one of the candy bars. Then ask: What problem has developed?

Scarcity condition: not enough candy bars to go around.

2. Tell the students that this situation is one faced by every society: how to allocate scarce resources among unlimited wants. Ask the students to suggest ways in which you might divide the two candy bars among the class; also ask them to identify problems associated with each method.

Teacher decides (not all students have an equal chance for a candy bar); cut each candy bar into 15 pieces (pieces now too small to satisfy students); hold a raffle (not all students have an equal chance for the candy bar); throw the candy bars into the middle of the room and let students grapple for them (too dangerous); sell the candy bars to the highest bidder (students with no money cannot get a candy bar)

3. Discuss the candy bar example as it relates more generally to our economic system. How do we answer the basic question about allocating scarce resources?

Resources are sold to those willing to pay market prices for goods and services.

4. Tell the students that today they will look more closely at markets in general and at the stock market in particular.

5. Ask the students to list several markets they have participated in over the last week.

Examples might include farmer's market, supermarket, retail clothing market and gasoline market.

6. Ask the students to name the characteristics these markets share; list these characteristics on the board. Then display Visual 1. Make the following points for each characteristic:

• Private property. Markets depend on an individual's ability to own and sell property. In market transactions, people can choose to sell property to others and transfer the right of ownership with the sale.
• Self Interest. Markets are based on individual, self-interested behavior. When a transaction occurs, both parties believe they will benefit.
• Competition. Markets foster competition because they allow the entry of many producers striving to meet the demands of consumers. Competition pressures these firms to satisfy consumer demand or be forced from the market by firms who can.
• The profit motive. Profits act as incentives for firms. Those firms that satisfy consumer desires and produce efficiently are rewarded with profits.
• Voluntary exchange. Because consumers have choices in a market, all exchanges are voluntary. This allows consumers and producers to focus on what they do best and to trade surplus production or wealth. Markets encourage trade and thus create wealth.
• Limited role of government. In a command economy, the government is the primary economic decision maker, producing or directing the production of goods and services. In a market economy, government's role is limited to protecting the integrity of the market by enforcing property rights and correcting market failures.

7. Disribute a copy of Activity 1 to each student. Have the students read the introductory passage and then complete "Market or Not?" Discuss the students' answers.

Answers: 1M (Car market is very competitive, with lots of advertising, etc.; dealership motivated by profit; dealer transfers ownership to consumer upon purchase); 2 NM (No competition; government provides this good; the day pass is a user fee paid to the U.S. government that provides this service; government  not motivated by profit; ownership of Yellowstone cannot be transferred to visitors); 3 NM (Government provides  this service, consumers must register vehicle if they wish to drive); 4 M (New carrier provides competition, gives consumers choice; Web site presents information for consumers; consumers get the best phone deal they can); 5 M (People are acting in their own interest; doughnut chain provides competition to other fast-food outlets); 6 NM (Government provides this good; not motivated by profit; no competition.)

8. Disribute a copy of Activity 2. Have the students read the paragraph and complete the data-retrieval chart.

Suggested responses:

9. Tell the students that they will now learn where they can go to buy stocks: the stock market. Ask the students where they go to buy DVDs or jeans or books. Music or media store; department store or jeans shop; bookstore. Explain that, just as with CDs, jeans and books, there is a market for stocks.

10. Tell the students that a stock is a share of ownership in a company and that people buy stocks for two main reasons: (1) they expect to share in company profits (called dividends) paid out to shareholders, or (2) they believe the price of the stock will rise above the purchase price.

11. Ask the students if they have ever seen a stock store at the mall. Where can they go to buy stocks? Explain that almost all stock sales and purchases -- often called stock trades -- are handled by a specialized salesperson called a broker. In addition, almost all stocks are sold by these brokers in secondary markets.

12. Display Visual 2. Explain that companies such as Company X often need additional resources to expand or run their business. One way to generate these resources is to offer all, or a portion, of the company for sale to the public-at-large ("take a company public"). This is done in the primary market through an initial public offering (IPO) in which stocks are sold to large investment banks. Investment bankers then sell the shares to brokerage houses, and brokers offer the shares for sale on the secondary market exchanges: the New York Stock Exchange, the Armerican Stock Exchange or the NASDAQ stock market.

13. Distribute a copy of Activity 3 to each student. Have the students read the introduction. Briefly review the overview of market mechanics, using Visual 2 as appropriate.

14. Have the students read the descriptions of the three major stock markets. Call on students to identify the distinctive characteristics of each of the three markets; record their responses on the board or an overhead.

Sample responses:

15. Have the students complete the Place the Stock activity. Answers below:

Closure

1. Tell the students that they have learned about the characteristics of a market ecomony and characteristics of stock markets. Review these characteristics with the students; remind them that the stock market is simply a specialized market where shares of stock are bought and sold. Quickly review the three major stock markets.

2. Place the students in groups of four. Ask them to look at the clothing and shoes they are wearing, their backpacks or book bags and any items they have brought with them to class. Can they determine the companies that made these items? If so, have them list several of these on blank sheet of paper. In addition - or if the cannot determine who manufactured these items - ask the students to list the retail stores where the items were purchased, and add these stores to the list. Again, review the characteristics of a market, noting how the students' purchases reflect  the characteristics of a market economy. Finally, have the students predict which of the three markets the companies that made their items (or sold them) might have been listed on. For example, if students have a Palm™ Pilot PDA, they might predict that Palm, Inc, is listed on the NASDAQ (it is), as Palm is a technology-based corporation. If students are wearing Nike™ brand shoes, they might predict that Nike is listed on the NYSE (it is), because it is such a large corporation. Once students have made their predictions, distribute copies of recent stock market reports from the local paper or USA Today or The Wall Street Journal. Were their predictions correct? Why or why not? If the class has access to the Internet, students can also use the following sites to check predictions:

http://www.nyse.com

http://www.amex.com

http://www.nasdaq.com

http://money.cnn.com/

Link to Multiple Choice Assessment Questions and Essay Questions

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