What is a Stock? or, Who Owns McDonald's?
National Council on Economic Education, New York, NY
Learning from the Market: Integrating SMG Across the Curriculum, Lesson 3
Private ownership is fundamental to the operation of a market economy. This lesson introduces the idea that individuals can become owners of a business by purchasing stock.
People who buy stock in corporations are owners of that corporation. They risk their money (personal wealth) on the success of the business. Any business is risky because the future is uncertain. The owners of the business bear that
risk. If the business succeeds, the owners benefit.
LANGUAGE OF ECONOMICS
Economize: To base decisions on an assessment of costs and benefits, choosing the best combination of costs and benefits from among the alternatives.
Ownership: The right to use something and enjoy its benefits.
Profit: The difference between revenues and the costs entailed in producing or selling a good or service; it is a return for risk-taking.
Risk: The chance of losing money. Risk is the opposite of safety.
Stock: A share of ownership in a company. Owners of stock receive part of the
company's profits-or bear some of its losses-up to the amount of money they put into the stock.
Content Standards and Benchmarks
National Standard Number: 2
Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something: few choices are "all or nothing" decisions.
National Standard Number: 4
People respond predictably to positive and negative incentives.
National Standard Number: 14
Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.
CROSS CURRICULUM SKILLS
Students develop skills in reading, listening, group participation, and writing.
- Students explain that a stock is a share of ownership in a business.
- Students explain that a company's risk is assumed by those who own it.
- Students explain that owners of stock are entitled to a share of a company's profits.
- Students describe the risk that a company's owners assume when the business introduces a new product.
- Students make decisions regarding stock ownership, weighing expected benefits against expected costs.
One class period
- Explain to students that today they will learn what a stock is and how stock ownership provides limited risks and potential rewards to investors
- Ask the students if they know anyone who owns something. (Everyone owns something: clothes, books, cars, businesses.) Have students provide examples of ownership they are familiar with. Find out whether any students know people who own businesses.
- Why do people like to own things? (Private ownership is a powerful incentive. It allows people to enjoy the benefits of what they own.)
- Ask: Can people legally do anything they want with items they own? To prompt discussion, provide a few problematic examples-e.g.,
1. Can you drive on the left side of the road with your car?
2. Can you use your clothes to tie up a student and lock him or her in a locker?
3. Can you use your books to start a fire in someone's living room?
4. Can you use your makeup to color over the computer monitor screen in school?
(The answer is no to each question. Each of these activities is illegal.)
- Ask: What does ownership mean? (It establishes who gets the benefits associated with the items and who bears the responsibility for what happens with them. You get to drive your car - no one else may without your permission - but you are responsible for driving legally and answering for any harm you cause when you use the car. Ownership means that privileges and responsibilities are clearly defined.)
- Distribute Activity 1, Stock Ownership: A Delicious Topic, to the class. Ask students to read it individually. Their purpose is to identify the costs and benefits of stock ownership. Ask:
1. How many people own McDonald's? (226,656)
2. Why would people wish to buy McDonald's stock? (They hope to share in the
profits and increase their wealth.)
3. How do you become an owner of McDonald's? (Buy McDonald's stock.)
4. What are the benefits of stock ownership? (Owners may share in the profits in the company.)
5. What are the risks of stock ownership? (Owners may lose some or all the
money used to buy stock.)
6. Will McDonald's accept Toad's suggested menu? (McDonald's is not ready for
ants, mosquitoes, or earthworm parts-even if they are dipped in chocolate.)
7. How do profits help McDonald's? (Profits help by increasing dividends paid to
stockholders and expanding the number of restaurants.)
- Divide the class into groups of three. Distribute Activity 2, Happy Birthday, Cookie. Ask students to use the information in Activity 1 as they answer the questions in Activity 2. Discuss the answers in class.
1. When Nabisco introduced its new cookies in 1912, Nabisco stockholders assumed a risk that was similar to Toad's risk in wanting to sell chocolate insects. What was that risk? (They risked losing money when the company introduced the new cookies. Neither Toad nor Nabisco knew that customers would buy enough of their products.)
2. Why were stockholders willing to assume this risk? (They thought they could earn a profit.)
3. Did the risk-taking turn out to be worthwhile for Nabisco's stockholders? Why or why not? (Yes and No. Stockholders have earned profits from the Oreo cookie, but they lost money on the other two cookies.)
4. Did the risk-taking by Nabisco's stockholders benefit the company's customers and employees? Why or why not? (Customers have benefited by obtaining products they enjoy and the company's employees have benefited by having a place to work and earn income.)
5. If you owned stock in the company, would you be entitled to take a package of Oreos from the supermarket whenever you wanted? Why or why not? (No. I would own only a tiny fraction of each cookie, building, or machine belonging to the company.)
- Distribute copies of Activity 3, Thank-You Note. Remind the students that every economic choice involves weighing expected costs against expected benefits. For home-work, ask students to read the directions and write Aunt Elizabeth a thank-you note that demonstrates that they understand the answers to the questions in Activity 2
Review the main points of the lesson:
1. A stock is a fractional share of ownership of a business.
2. Stock owners are entitled to a share of a company's profits.
3. There is risk in owning any company, and stockholders share that risk.
4. Introducing a new product is a risky venture for companies.
Multiple Choice Questions
1. What benefits do you receive from owning a share of a company's stock?
a. You may vote for members of the board of directors.
b. You receive a share of profits if the company does well.
c. You might lose your home or car.
*d. Answers "a" and "b" are correct.
2. Who decides what products will be produced by a company with many stockholders?
a. The owners
*b. The managers
c. The customers
d. The employees
3. Who decides what products will be produced by a company with many stockholders?
a. The owners
*b. The managers
c. The customers
d. The employees
Most of us are aware of successful products that companies make - Coke, hamburgers, head-lights, and personal computers, for example. But not all ideas succeed in the market. What would happen if a company decided to sell a soft drink that tasted like baking soda? Discuss this question in a short essay. (Customers tend to prefer soft drinks that are sweet and thirst-quenching. A baking soda taste would not taste sweet or quench anybody's thirst, so customers would probably choose not to buy it. The company would not make money selling it. Employees would lose their jobs making it. Managers would discontinue production of the beverage and use the resources to produce some-thing different. Owners would share in the loss the company suffered in making the product.)
Think of one company whose shares you would be willing to purchase. Spend a few minutes writing descriptive notes to yourself about two popular products made by that company. Then write a letter to Maria explaining under what conditions stock in this company might be a smart buy.