This article discusses what a stock market crash is and how it can lead to a financial crisis. It is meant to be used as a guide for lesson plans on stock market crashes and bubbles. A fun group project is included
Stock Market Bubbles and Crashes
What makes a crash? Historically, crashes often follow the burst of a market bubble. This stock market lesson plan defines the terms stock market crash and stock market bubbles. It isan introductory lesson plan on financial literacy. It is the first of a series of lesson plans.
For the project, the class should be divided into four groups representing the four crashes discussed: The recent financial crisis, The Crash of 1929, The South Sea Bubble and The Tulip and Bulb craze. Each group will be responsible for writing and performing a skit about a person who got caught up in the frenzy and lost money. Students should use actual prices and commodity names from their assigned era and, if possible, try to dress in a historically accurate fashion.
The lesson plans are meant to conclude with student presentations.
In this first lesson paln, the economic crisis of recent years is introduced along, with the student presentation assignment.
Lesson Plan: Stock Market Bubbles and Crashes
Lesson Focus: Stock Market Crashes and Bubbles
Grade Level: Middle School or High School
Time Needed: 45 minutes
Vocabulary Words: derivative, stock market, stock market crash, market bubble, credit, mortgage
Lesson Outline: Lecture Format
Begin by assigning the groups and explaining the group project.
- There have been many infamous bubbles and crashes which all share common features; these being, a bubble occurs when a commodity is priced way above its true value, eventually common sense rules and the bubble busts, usually followed by a crash, or steep decline in the market in which a given index drops by 20% or more.
The current financial crisis is no different. The recent market decline followed a sharp drop in the real-estate market and the mortgage crisis, especially in sub-prime mortgages.
Real-estate was relatively cheap in the late 1990’s following a slump in the beginning of that decade. At the same time, loans were becoming easier to obtain as mortgages mutated from local bank instruments to global investment devices backed by investor monies. That is, it used to be that a potential home buyer met with a local banker, established his or her credit worthiness, made a substantial down-payment and began making monthly payments on a mortgage with a reasonable rate. At the close of the 1990’s, however, home buyers with questionable credit could obtain loans with little or no cash down at high-rates from large, global financial institutions. These sub-prime mortgages were often broken up and turned into investment vehicles known as collateralized debt obligations or C.D.O’s. These types of investments are known as derivatives. Derivatives are investments whose entire worth is based on the value of another investment or asset.
- Home prices soared through the early part of the twenty-first century, and the Federal Reserve cut interest rates causing the housing market bubble to expand further. Eventually home values dropped, however, and the negative movement in the real-estate sector exposed the risky mortgages, creating repercussions in the banking and security industries.
- The credit market tightened and loans became harder to obtain.
- The rate of foreclosures rose.
- Have the students find definitions for the vocabulary terms using the references below, a dictionary, or their text.
- Three historical stock market crashes will be reviewed in the next lesson plan-Stock Market Crashes: Three Crashes from Times Gone By
Understanding the Financial Crisis
This series will discuss financial crises and financial market bubbles and crashes. The articles contain lesson plans that culminate with the class divided into four groups representing four stock market crashes; each group will write a skit about a person who loses money during their crash.
- Stock Market Crashes: Today & Yesterday
- Stock Market Crashes: Three Crashes from Times Gone By
- Reacting to the Financial Crisis: Psychology & Investing
- Frequently Used Economic Terms for Lesson Plans