Chapter 20
Investments
Student Performance Objectives:
Section I Stocks
20-1 Understanding Stocks and Distributing Dividends on Preferred and Common Stocks
20-2 Reading Stock Quotations
Section II Bonds
20-6 Understanding Bonds and Reading Bond Quotations
Section III Mutual Funds
20-9 Understanding Mutual Funds and Reading Mutual Fund Quotations
20-10 Calculating the Sales Charge and Sales Charge Percent of a Mutual Fund
Chapter Notes, Teaching Tips and Lecture Launchers
• Lecture Launcher: Discuss the concept of “financial risk”
• Use Exhibit 20-1, “Risk and Return,” to illustrate the range of investments available—
from savings accounts and certificates of deposit on the conservative side to futures
• Lecture Launcher: Ask students, “What is the best way to make money in the market? Buy
and sell investments frequently in an attempt to buy on the upswing and sell on the
downtick? Or buy and hold?”
• Explain that buying and selling frequently in order to make a profit on small changes
• Be sure students understand the difference between stocks and bonds.
• Stocks represent rights of ownership of a company. The investor becomes an owner
• The Business Decision at the end of the chapter, “Paper Profit,” gives students a chance to
calculate the value and return on investment for a diversified portfolio.
• Spotlight: An important lesson occurs in part c and d, where a positive 3.3% return
on investment turns into a 1.3% loss after taking the broker’s commission into
account.
• Spotlight: Invite a stockbroker to class to discuss “current happenings” related to
investments.
• In addition, have him or her talk about career opportunities and the educational
requirements for becoming a stockbroker.
Section I Stocks
• Lecture Launcher: Discuss with students the Dow-Jones Industrial Average. Explain that
it is one of many “indicators” used to follow trends in the stock market. It is the average
value of a group of 30 stocks considered to be typical of today’s economic activity.
• Explain to students that when a company is having financial problems and eventually goes
into bankruptcy liquidation, all of the remaining assets are “liquidated” into cash. The
resulting cash is then distributed in more or less the following order:
• Spotlight: Be sure students understand that when a share of stock is purchased, unless it is
the initial public offering (IPO), it is being purchased from another shareholder who is selling
their stock, not from the company itself.
• Explain that a company has a fixed number of outstanding shares, which are bought
and sold (traded) among investors each day on various exchanges.
• Collaborative Learning Activity: Have students bring in the stock market quotations from
the local newspaper.
• Classroom Activity: Discuss with students the Dow-Jones Industrial Average. Explain that
it is one of many indicators used to follow trends in the stock market.
It is the average value of a groups of 30 stocks considered to be typical of today’s economic
• Be sure students understand that when purchasing stock commissions are added to the cost of
the stock, when selling, the commissions are deducted by the brokerage firm from the sale
price to get the proceeds of the sale.
• Spotlight: In August 2000, the NYSE began phasing in a move to decimals – pricing stocks
• Discuss the solution to Try It Exercise 5, calculating the current yield of a stock.
• Collaborative Learning Activity: In groups of two’s or three’s, have students work Try-It
Exercise 7, calculating the cost, proceeds, and gain or (loss) on a stock transaction.
• Classroom Activity: Have students complete the Business Decision “Dollar-Cost
Averaging”, either at home or in class. Review the results in class. Note the lower average
Section II Bonds
• Lecture Launcher: Point out that Treasury bonds are fully guaranteed by the United States
government and therefore have lower interest rates than those of other issuers such as
corporations and municipalities. Since corporate and municipal bonds carry a “risk factor,”
bond ratings can be used by prospective purchasers to evaluate how safe one bond is
compared with another.
systems published by Standard & Poor’s and Moody’s Investors Service.
• Spotlight: Students should be aware that bond interest is always constant, regardless of what
you paid for the bond; the yield is what varies depending on the price of the bond.
• The price and yield of a bond will fluctuate until the yield is equal to market rates.
• Collaborative Learning Activity: In groups, have students work Try-It Exercise 9,
calculating the cost of purchasing a bond, and Try-It Exercise 10, calculating the proceeds of
the sale.
Section III Mutual Funds
• Spotlight: Be sure students understand that a mutual fund is a professionally managed
investment company that “pools” money from many people and invests it in stocks, bonds,
and other securities.
• Have students keep in mind the difference between the net asset value and the offer
price.
• Use Exhibit 20-6, Wall Street Journal Mutual Fund Quotations table, to illustrate how mutual
funds prices are typically listed each day for investors.
• A Capital Appreciation Fund seeks maximum capital appreciation by investing in
companies that do not pay dividends.
• A Growth and Income Fund seeks both long-term growth of capital and current
• Point out to students that although newspapers list the daily net asset value (NAV) of a fund,
to get the true measure of a fund’s performance, dividends or capital gains paid out to the
shareholders must also be taken into account.
• It is interesting to note that a capital gains distribution may actually depress the share
• Explain the typical sales charges and other fees paid by investors in mutual funds.
• Front-end loads of 4% to 8% are sales charges generally imposed by funds that sell
shares through stockbrokers and financial planners.
• For students wanting more information on mutual funds, direct them to some of the many
credible (and away from the many non-credible) resources to be found online, including
• Collaborative Learning Activity: In groups, have students work Try-It Exercise 16 on page
703, calculating return on investment.
Questions Students Always Ask
“Why are they called ‘bull’ and ‘bear’ markets?”
• According to Every Man His Own Broker, or, A Guide to Exchange Alley, by Thomas
Mortimer, 10th Ed. 1785, the term “Bull” describes someone who has bought long (bought
“What’s the secret to making money in the market?”
• Time.
“What do I do if I don’t have enough money to invest?”
• Investing at least a little is better than investing nothing at all! Take an hour or two to figure
“But I’m young; I don’t have to worry about this until later, do I?”
• Calculate the value at age 67 of a monthly investment of $250 (the $3,000 annual amount
that can be invested in a tax-deferred IRA) made from age 23 to age 29, with no more
“How much money does it take to get into a mutual fund?”
• It depends on the fund, but there are funds available in which you can invest for as little as
“What is diversification?”
• Draw a graph with dollars on the vertical axis and time on the horizontal axis. Draw line