Lesson 8: Stocks in a Box

Transcription

1 Lesson 8: Stocks in a Box Overview Students learn that companies are classified by industries and sectors. Objectives A. Students explain the difference between an industry and a sector. B. Students classify companies according to sectors and industries. C. Students explain how investing in different sectors and industries can diversify one s stock holdings. Vocabulary Diversification: Reducing risk by combining different investments whose prices aren t likely to move in step with one another. Industry: A group of companies producing similar products or services. Sector: A broad group of similar industries. Class Activities Activity 8A: Sector Search Before Class: Make copies for all students of the reading, Economy Wrap and of Activity 8A, Sector Search. Decide if students will complete the Activity individually or in small groups. During Class: If students are to complete the Activity in small groups, have them form the groups now. Give students a copy of Economy Wrap and ask them to read it. Say: The Sectors and Industries part of the reading is like a map for reference, not for memorization. Distribute copies of Activity 8A, Sector Search, to each student. Ask the students (or groups) to complete the crossword puzzle. When students have completed the puzzle, have them share their answers. Students will need their copies of Economy Wrap for other Activities in this lesson. Collect and save the reading if you re not planning to continue today. Suggested answers: Across: Conglomerate. Consumer Cyclical 4. Down: 1. Consumer Noncyclical 2. Capital Goods. Basic Materials Lesson 8: Stocks in a Box Page 85

2 Activity 8B: Wrap A Dow Before Class: Make copies for all students of Activity 8B, Wrap A Dow. Have available the students copies of Economy Wrap, which they used in the first activity. Decide if you want to use the answer sheet for Wrap A Dow to make a transparency for classroom use. If so, prepare the transparency before class. During Class: Divide the class into seven (or four) small groups and distribute the students copies of Economy Wrap. Remind students how they used the reading in the first activity. Distribute a copy of Activity 8B, Wrap A Dow, to each student. (The industry classification used in the activity is the one found at Yahoo and Market Guide and noted at the end of Economy Wrap.) Assign four different companies to each of the seven groups (or seven different companies if you re using only four groups). Ask the groups to use the map in the Economy Wrap reading to complete the Activity as best as they can. Say: Some companies are not easy to place, so use your best judgment. Ask the groups to complete their tasks. When they have finished the exercise, have each group present its answers. As they do so, have all students fill in the appropriate blanks on their Activity sheets. Use the answer sheet as a guide to help students complete the blanks on their Activities. If you prepared a transparency of the answer sheet, display that now. (If there are differences, and students disagree with a grouping on the transparency, don t push the transparency s grouping as a hardand-fast rule. Reassure them that sometimes it s very difficult to decide just where a company belongs.) Finally, ask students to complete the table at the end of their Activity sheets by determining the number of companies in each sector. Suggested answers: See the accompanying answer sheet for each company s sector and industry. The following table shows the number of companies in each sector: Sector's Name Basic Materials Capital Goods Consumer Cyclical Consumer Noncyclical Energy Financial Healthcare Activity 8C: Diversified Eggs No. of Companies in this Sector Before Class: Make a copy of Activity 8C, Diversified Eggs for each student. During Class: Assign this Activity either as an individual or a group activity. Distribute a copy of Activity 8C: Diversified Eggs to each student. Have students complete the activity. Then ask them to share their answers. Let student know that they will learn more about diversification in the next lesson Lesson 8: Stocks in a Box Page 86

3 Suggested answers: 1. You don t have a crystal ball, so in December 1997 you invested all your money in the Dow s stocks in the consumer cyclical sector. How much did you end up with at the end of 2002? My investment would have shrunk by 4%, so I would have ended up with $10,000 4% x $10,000 = $6, Not knowing the future in December 1997, you decided to diversify your investment by buying $1,000 worth of Dow stocks in each sector. Assuming your stocks in each sector changed exactly as shown in the chart, how much did you end up with at the end of 2002? My $1,000 investment in each sector would have grown as shown on the chart. At the end of 2002, therefore, I would have had a total investment worth $10,41. Tech. $1,000 + (47% x $1,000) = $1,470 Conglom. $1,000 + (47% x $1,000) = $1,470 Health $1,000 + (28% x $1,000) = $1,280 Energy $1,000 + (14% x $1,000) = $1,140 Financial $1,000 + ( 4% x $1,000) = $1,040 Con.non. $1,000 + ( 11% x $1,000) = $890 Bas. Mat. $1,000 ( 17% x $1,000) = $80 $1,000 ( 19% x $1,000) = $810 Cap. Gds. $1,000 ( 25% x $1,000) = $750 Con. Cycl. $1,000 ( 4% x $1,000) = $660 Total = $10,40 Teacher s Note: The total investment increased from $10,000 to $10,40. The increase of $40 is an increase of.4%, which is less than the Dow s increase of 5.5% shown on the chart. A bright student might wonder why the average percentage change for all sectors is not identical to the change in the overall Dow. If you get such a question, explain that the Dow s calculation weighs each company according to its stock price, so that companies with higher stock prices receive more weight in the Dow s calculation. In the example above, however, each sector is given equal weight when calculating the increase of $40, or.4%. Lesson 8: Stocks in a Box Page 87

4 Economy Wrap You have an endless supply of boxes and wrapping tape and lots of energy and ambition. Your assignment? To wrap up all the companies in the economy. Impossible, you say? Well, sure it is if you take the task literally. So use your imagination instead. First, gather all the companies in the economy and wrap each one in a separate box. Then, sort the company boxes into industries. An industry is a group of companies producing similar products or services. Put each company into its appropriate industry box. Next, sort these industry boxes into sectors. A sector is a broad group consisting of similar industries. Then, put each industry into its appropriate sector box. The diagram below is an illustration. Sector Companies Industry Apple Gateway Dell Computer Hardware Intuit Microsoft Software Symantec The six companies above have been sorted into two industry groups according to the kinds of products or services they make. Gateway, Apple, and Dell make computers, so these similar companies are part of the computer hardware industry. Intuit, Microsoft, and Symantec are similar to one another but differ from Gateway, Apple and Dell. They produce computer software, so they go into the industry box with this label. Finally, the Computer Hardware and Computer Software industries are similar to one another because these industries produce technology-based products and services. These industries go in the Sector box labeled. Of course, the diagram illustrates only a few of the many companies, industries and sectors in our entire economy. So check the following list, which categorizes companies throughout the economy into its various sectors and industries. Lesson 8: Stocks in a Box Page 88

5 Economy Wrap Page 2 of Sectors and Industries * 1. Basic Materials Sector (Companies that produce raw materials that other businesses put into products they make) a. Chemical Manufacturing b. Chemicals - Plastics & Rubber c. Containers & Packaging d. Fabricated Plastic & Rubber e. Forestry & Wood Products f. Gold & Silver g. Iron & Steel h. Metal Mining i. Misc. Fabricated Products j. Non-Metallic Mining k. Paper & Paper Products 2. Capital Goods Sector (Companies that produce equipment, buildings, and other long-lasting goods that businesses use over time in their production) a. Aerospace & Defense b. Construction. & Agric. Machinery c. Construction - Supplies & Fixtures d. Construction - Raw Materials e. Construction f. Misc. Capital Goods g. Mobile Homes & RVs. Sector (Companies operating in two or more unrelated industries) a. 4. Consumer Cyclical Sector (Companies that make products for consumers personal use and have sales that rise and fall with the economy s ups and downs, or cycles) a. Apparel/Accessories b. Appliance & Tool c. Audio & Video Equipment d. Auto & Truck Manufacturers e. Auto & Truck Parts f. Footwear g. Furniture & Fixtures h. Jewelry & Silverware i. Photography j. Recreational Products k. Textiles - Non Apparel l. Tires 5. Consumer Non-Cyclical Sector (Companies that make products for consumers personal use and have sales that aren t greatly affected by the economy s ups and downs, or cycles) a. Beverages (Alcoholic) b. Beverages (Non-Alcoholic) c. Crops d. Fish/Livestock e. Food Processing f. Office Supplies g. Personal & Household Products h. Tobacco 6. Energy Sector a. Coal b. Oil & Gas - Integrated c. Oil & Gas Operations d. Oil Well & Equipment 7. Financial Sector (Companies that provide services relating to the management of money and risk) a. Consumer Financial b. Insurance (Accident & Health) c. Insurance (Life) d. Insurance (Miscellaneous) e. Insurance (Prop. & Casualty) f. Investment g. Misc. Financial h. Money Center Banks i. Regional Banks j. S&Ls/Savings Banks 8. Health Care Sector a. Biotechnology & Drugs b. Healthcare Facilities c. Major Drugs d. Medical Equipment & Supplies Lesson 8: Stocks in a Box Page 89

6 Newspaper Quotes Page 2 of 9. Sector (Companies that perform various tasks for consumers and businesses instead of making tangible products) a. Advertising b. Broadcasting & Cable TV c. Business d. Casinos & Gaming e. Communications f. Hotels & Motels g. Motion Pictures h. Personal i. Printing & Publishing j. Printing k. Real Estate Operations l. Recreational Activities m.rental & Leasing n. Restaurants o. Retail (Apparel) p. Retail (Catalog & Mail Order) q. Retail (Department & Discount) r. Retail (Drugs) s. Retail (Grocery) t. Retail (Home Improvement) u. Retail (Specialty) v. Retail () w.schools x. Security Systems & y. Waste Management 10. Sector (Companies that produce knowledge-based products that enable other businesses to innovate and expand their productive capacities) a. Communications Equipment b. Computer Hardware c. Computer Networks d. Computer Peripherals e. Computer f. Computer Storage Devices g. Electronic Instruments & Controls h. Office Equipment i. Scientific & Technical Instruments j. Semiconductors k. Software & Programming 11. Transportation Sector a. Air Courier b. Airline c. Misc. Transportation d. Railroads e. Trucking f. Water Transportation 12. Utilities Sector a. Electric Utilities b. Natural Gas Utilities c. Water Utilities * There are no hard-and-fast rules for categorizing companies and industries. The list above is one popular method, which you can find at various web sites, such as the following: Yahoo!Finance: ( MarketGuide.com: ( hot.asp?rn=winb&target=%2fstocks%2fwhatshot%2fwinb) Other ways of categorizing our economy are found at the following sites: Hoovers Online: ( The Wall Street Journal Online: (subscription required: default.asp?bcind_ind=bc_all&bcind_period=mo) CBSMarketWatch: ( BigCharts: ( PCQuote.com: ( Lesson 8: Stocks in a Box Page 90

7 Activity 8A: Name That Sector Directions: First review the Sectors and Industries portion of Economy Wrap, and then use the information below to complete the following crossword puzzle Each word in the puzzle identifies the name of a sector that the reading, Economy Wrap, uses to categorize industries and companies. Across 1. Companies in this sector produce knowledge-based products that enable other businesses to innovate and expand their productive capacities. Examples are Intel Corporation, Cisco Systems and Hewlett-Packard Company. 2. Companies in this sector have two or more unrelated businesses in different industries. The companies are often very large. Vivendi Universal and General Electric are examples.. Companies in this sector sell goods and services to consumers and have sales that typically rise and fall with the ups and down (cycles) of the economy. Examples are Nike, Skechers, and Tommy Hilfiger Corporation. Lesson 8: Stocks in a Box Page 91

8 Activity 8A: Name That Sector Page 2 of 2 4. Companies in this sector perform various tasks for consumers instead of making tangible products for them. For example, retail stores provide location and convenience but don t actually produce the goods they sell. Motion picture companies provide entertainment. Restaurants cook and serve food but don t produce the ingredients. Walt Disney, Pixar and McDonald s are illustrations. Down 1. Companies in this sector sell goods and services to consumers and have sales that aren t very sensitive to the ups and down (cycles) of the economy. Illustrations are Hershey Foods, General Mills, Revlon and Coca-Cola. 2. In this sector, companies produce equipment, buildings, and tools that businesses use over time to make other goods and services. Examples are Caterpillar Inc., Deere & Company and Boeing Corporation.. Companies in this sector provide resources and supplies that become ingredients for other goods and services. Dow Chemical Company and United States Steel Corporation are two examples. Lesson 8: Stocks in a Box Page 92

9 Activity 8B: Wrap a Dow Directions: The following list presents the 0 companies in the Dow Jones Industrial Average. Use the Column entitled Hints along with the reading, Economy Wrap, to locate, as best as you can, the sector and industry for each of the 0 companies. Write the name of each company s sector in the column with that heading and the name of its industry in the column market industry. In the column labeled Sector No./ Ind. Letter, write the Sector s number and Industry s letter found on Economy Wrap. The first two entries have been completed as an illustration by using the categories found at Yahoo!Finance. Company Hints M Co. (MMM) This company is full of M and Ms but not an ounce of chocolate. You ll find it in various markets, including transportation, health-care products, consumer products, and even Post-it notes. Sector Name Industry Sector No./Ind. Letter A Alcoa Inc. (AA) This company finds its mettle in aluminum. It operates in all areas of aluminum production, including mining, refining, smelting, fabricating and recycling. Basic Materials Metal Mining 1H Altria Group Inc. (MO) American Express Co. (AXP) AT&T Corp. (T) Boeing Co. (BA) Caterpillar Inc. (CAT) It s not easy to place this maker of many different products, but this company s main fire makes lots of smoke. This company expresses itself in credit cards, travelers checks, financial planning, investment products, insurance and other related products and services. What suits this company to a T? Communication services for voice, data, and video fit it so well. This company really airs its crafts. It produces commercial and military aircraft, missile systems, and other aerospace related products and services. This company crawls with innovation as it produces machinery for mining, construction, and agriculture. Citigroup Inc. (C) The company is a big player in the global city with its supermarket of financial services. Lesson 8: Stocks in a Box Page 9

10 Activity 8B: Wrap a Dow Page 2 of Coca-Cola Co. (KO) This company bubbles with popularity, so you already know where to find its fizz. E.I. DuPont de Nemours & Co. (DD) Eastman Kodak Co. (EK) Polymers and resins aren t a music group but a big part of this company s production of chemicals. This company has been in the big picture for a long time with its production of photographic film and other products that offer a good image. Exxon Mobil Corp. (XOM) This company has lots of energy for its daily drill of exploring for and producing oil and natural gas and making oil products General Electric Co. (GE) Gee, this company may not shock you, but it operates in diverse markets, such as electricity, aircraft engines, medical equipment, broadcasting and finance. General Motors Corp. (GM) Hewlett-Packard Co. (HPQ) Generally, this company is in motors, just where it ought to be. It s not hard to place this company after its merger with Compaq Computer. Home Depot Inc. (HD) Honeywell International (HON) This company is right at home helping with improvements. Honeywell spreads its sweetness over aerospace, control technologies, automotive products, specialty chemicals, fibers, plastics and electronics. Intel Corp. (INTC) International Business Machines (IBM) International Paper Co. (IP) This company really dips into chips. This international company helps put business machines on top of your lap. We often write ourselves with the help of this company s products. J.P. Morgan Chase & Co. (JPM) This company is at the center of finance as it chases its prosperity. Johnson & Johnson (JNJ) McDonald s Corp. (MCD This business never gets sick and tired of making us less tired and sick. If you need help with this one, you re really in a pickle Merck & Co. Inc. (MRK) One of the companies that really wears the suit in pharmaceuticals. Lesson 8: Stocks in a Box Page 94

11 Activity 8B: Wrap a Dow Page 2 of Microsoft Corp. (MSFT) A company that saw its window of opportunity and programmed its way to success. Procter & Gamble Co. (PG We all invite this personable company into our households. SBC Communications (SBC) Its name communicates its place. United Technologies Corp. (UTX) A company well named for its diverse operations across many different markets, including elevators, air-conditioning and heating equipment, jet engines and helicopters. Wal-Mart Stores Inc. (WMT) Walt Disney Co. (DIS) Giving even a tiny hint for this company would be to discount your intelligence.. This company may make movies, but you ll find its broad cast of characters in a TV or cable. After completing the table above, check the number of companies in each sector and fill in the following table. The Dow s companies are spread across only 10 of the 12 sectors listed in the reading, Economy Wrap. The two missing sectors are Transportation and Utilities. They re missing because the Dow Jones Company uses two other indices to measure stock price in these sectors. The indices are the Dow Jones Transportation Average and the Dow Jones Utility Average. Summary Sector s Name No. of Companies in this Sector Basic Materials Capital Goods Consumer Cyclical Consumer Noncyclical Energy Financial Healthcare Lesson 8: Stocks in a Box Page 95

12 Wrap a Dow: Answer Sheet Company Sector Name Industry No./ letter M Co. (MMM) a Alcoa Inc. (AA) Basic Materials Metal Mining 1h Altria Group. Inc. (MO) Consumer Noncyclical Tobacco 5h American Express Co. (AXP) Financial Consumer Financial 7a AT&T Corp. (T) Communication 9e Boeing Co. (BA) Capital Goods Aerospace & Defense 2a Caterpillar Inc. (CAT) Capital Goods Const. & Agr. Machinery 2b Citigroup Inc. (C) Financial Money Center Banks 7h Coca-Cola Co. (KO) Consumer Noncyclical Beverages (non-alcoholic) 5b E.I. DuPont de Nemours & Co. (DD) Basic Materials Chemicals, Plastics & Rubber 1b Eastman Kodak Co. (EK) Consumer Cyclical Photography 4i Exxon Mobil Corp. (XOM) Energy Oil & Gas, Integrated 6b General Electric Co. (GE) General Motors Corp. (GM) Consumer Cyclical Auto & Truck Manufacturers 4d Hewlett-Packard Co. (HPQ) Computer Hardware 10b Home Depot Inc. (HD) Retail (Home Improvement) 9t Honeywell International (HON) Capital Goods Aerospace & Defense 2a Intel Corp. (INTC) Semiconductors 10j International Business Machines (IBM) Computer Hardware 10b International Paper Co. (IP) Basic Materials Paper & Paper Products 1k J.P. Morgan Chase & Co. (JPM) Financial Money Center Banks 7a Johnson & Johnson (JNJ) Healthcare Major Drugs 8c McDonald s Corp. (MCD) Restaurants 9n Merck & Co. Inc. (MRK) Healthcare Major Drugs 8c Microsoft Corp. (MSFT) Software & Programming 10k Procter & Gamble Co. (PG) Consumer Noncyclical Personal & Household Products 5g SBC Communications Inc. (SBC) Communication 9e United Technologies Corp. (UTX) Wal-Mart Stores Inc. (WMT) Retail (Dept. & Discount) 9q Walt Disney Co. (DIS) Broadcasting & Cable TV 9b Lesson 8: Stocks in a Box Page 96

13 Activity 8C: Diversified Eggs Years ago a popular comedian offered this advice: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up. Then sell it. If it don't go up, don't buy it." The trouble is, no one knows beforehand if a particular stock will rise or fall or by how much it might change. So putting all your investment eggs in one basket is very risky because the value of the stock could tumble - and you'd lose a bundle. One solution is to spread your investment eggs among various baskets by buying stocks of different companies. Investing this way is called diversification. Diversification reduces risk because it combines different stocks whose prices aren't likely to move in step with one another. If one stock sinks, for example, another might rise and offset your loss. The chart at the right shows changes in the Dow Jones Industrial Average and in the stock prices of its 0 companies. The companies are grouped according to their sectors identified in Activity 8B, Wrap A Dow, and their price changes have been averaged for each group. Changes in the Dow by Sector 47% 47% (Dec. 1, 1997 Dec. 1, 2002) Directions: Answer each of the following questions. Assume that the change in any stocks you buy in a particular sector exactly matches the sector s average as shown on the chart. 5.5% 28% 14% 4% 1. You don t have a crystal ball, so in December 1997 you invested all your money in the Dow s stocks in the consumer cyclical sector. How much did you end up with at the end of 2002? 2. Not knowing the future in December 1997, you decided to diversify your investment by buying $1,000 worth of Dow stocks in each sector. Assuming your stocks in each sector changed exactly as shown in the chart, how much did you end up with at the end of Dow Healthcare Energy Financial 11% 17% 19% 25% 4% Consumer Noncyclical Basic Materials Source: The Wall Street Journal Online ( Capital Goods Consumer Cyclical Lesson 8: Stocks in a Box Page 97

14