Teach Your Kids About Stocks

April is financial literacy month and a great time to learn about stocks.  Here is a simple exercise parents can do along with young people.

Where was the market when you were born?

Generally when investment people say "where is the market?" there are a couple of stock market averages they are talking about - the Dow Jones Industrial Average and the S&P 500.  As an exercise, it would be good to look them up and write a short 1 or 2 paragraphs describing them.

What we want to do is go to a financial website and find the value the S&P 500 the day you were born and compare it to where it is know.  Then we can figure out how much it has gone up or down in price since then.  But more on that later.  Let's begin by going to www.yahoo.com, a site you may already be familiar with.

On the lefthand side, you should see an icon for "Finance."  Click and you'll come to 

Source: Yahoo

CLICK TO ENLARGE  The arrow points to what we are after - the S&P 500.  Click on it.  You see the most recent value of this index.  If you are doing this while the market is open and trading, the index will be changing.  Now, as you can see, it is at 1398.08.

Notice on the lefthand side "Historical Prices."  Click and you'll come to:

Source: Yahoo

CLICK TO ENLARGE  As you can see, I changed the "Start Date" to 3/3/1998. This is where you want to put your birthday.  I also filled in the circle for monthly prices - you can also do daily or weekly.

Now all you have to do is click "Get Prices." This gives you monthly prices and, if you click "Last," you will find that the S&P 500 was at 1101.75 on 3/3/1998.

Calculate Return

Now you have the information to calculate the return.  But first notice that, if you had invested $1,191.75 in the index on the day you were born, it would be worth $1,398.08 today just from the change in the index.  There is more, but first we should calculate the percentage return of the index.  To do this, we take the ending value 1398.08 and subtract the starting value 1101.75 and then divide this amount 296.33 by the starting amount of 1101.75.  Multiply by 100 and you have it in percentage terms of +26.9%

As I said there is more.  Stocks pay a dividend.  The dividend on the S&P 500 has been around 2%/year.  So that would add another +30% approximately to the return   (2%/year over 14 years compounded).  The bottom line is that, if you had invested $1,000 in the S&P 500 on the day you were born, it would be worth over $1,500 today.

Find Returns For Individual Stocks

The same exercise produces returns for stocks over whatever period you are interested in.  First, however, you need the stock's ticker symbol.  This is easy.  In the quote box at the Yahoo! Finance home page, just type in the name of the company you are interested in.  For example, I'm sitting here noticing that Kellogg produces the cereal I'm eating.

My computer is so smart it lists what I am looking for before I even finish typing.  Now with the ticker symbol K, I can go through the exercise above.  I can find prices and I can find dividends and consequently calculate returns over various periods.

Homework Pick 2 stocks and find out how they have done (i.e. their return) over the past 10 years.