As your child becomes more aware of money and other financial concepts, it is vital that you arm them with some important investment knowledge. Investing is the cornerstone of a secure financial safety net — it is never too early to begin teaching children and teens the fundamentals of financial literacy, so teach your children about investing early and practically—by doing.
When you’re ready to educate your children about investing, keep it simple. Start off with the basic concepts of saving for financial goals, then talk about the risks and rewards of investing, and encourage them to follow the performance of a stock or two in the newspaper or online. Once they have a grasp for these basic concepts, opening a custodial account with a brokerage firm is a great way for kids to begin investing.
Make investing decisions together and let your children test things out before they actually purchase any stock. Trying a custodial account will give you access to the brokerage firm’s research. There is always going to be a risk to investing and generally speaking, the higher the potential reward, the higher the risk of losing money.
You would be surprised at how quickly even a young child can pick up on basic investing concepts. Start teaching them about the stock market as youngsters and with decades ahead of them, they can reap great benefits of compounded growth.
Give your children and teens a nudge toward financial independence. Here are some ideas to help you learn investing basics as a family:
Make Investing a Family Activity
Some parents are guilty of not discussing personal finance with their children, and almost all parents are guilty of not discussing investing with their children, however, investing should be a family activity. Children mature at different rates, so it may take some time before your child is ready to tackle concepts like portfolio creation and asset allocation; however, the basics of investing can be taught quite young.
Investing Basics for Children and Teens
Risk and Reward
Before you have your kids spending weekends at the library researching company profiles, you will have to explain risk and reward. Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that an investment experiences over time – the return on investment (ROI). You can also explain that the younger you are, the more time you have to invest and therefore may be able to stand high risk investments, because the investor has time to recuperate any loses.
Stocks
Stocks have variable risks and returns on investments. On the whole, they are categorized as high risk and high return. You have to make it clear that the risks involved in the stock markets cannot be predicted. But even with the unknown risks, the stock market is a strong investment because, over time, it sees a general rise.
CDs, Bonds & Debt Securities
A bank CD, bond or preferred stock is a low-risk, low-return investment. Typically, these investments pay only a small amount over the prime interest rate because they are backed by stable institutions (usually banks or governments).
Therefore, it may be best start your child with stocks and explain that bonds become more important as you age and need less-risky investments. Your child will probably not have enough money to make bonds worthwhile, and may actually lose money to inflation.
Getting Your Children’s Interest in Participation
The key to grabbing a child’s interest is to make the connection to everyday life — whether it’s a stock from your own company, one of your retirement mutual fund stocks or discussing how well their favorite restaurant is doing against its competitors.
When you are checking your stocks, show your child the companies of which you own a small part. If you own any exciting companies that might be of interest to your children – plane manufacturers like Boeing (BA), technology and video game companies like Sony (SNE) or entertainment groups like Disney (DIS) and Universal Studios (MCAI) – make sure that you request the company’s current investor relations package, or print it off the internet, so that you can show your child more about those companies, including how much they earned, what they make, how many people work for them, etc..
Then you can ask your child what company he or she would like to buy. For example, McDonald’s, Nintendo and Disney are popular with most children. Then review the company investor packages for their favorite companies. Disney’s investor relations newsletter that features their characters parading through their announcements so your child has something interesting to flip through, even though he or she may not understand all the numbers.
Explain what it means to own part of a company. If your child likes eating fast food, visit a few different fast food restaurants and ask them some questions which would affect their decision to own part of the company:
- Which restaurant seemed the busiest?
- Which restaurant was the cleanest?
- In which one do the employees look the happiest?
- Which one do you or your friends prefer to visit?
Mock Investment Portfolios
If they look around their home, classrooms, the mall and on TV, they’ll see firms such as Nike, Microsoft, Coca-Cola, Apple, Target, McDonald’s, Disney, Macy’s, H&M, PepsiCo, Boeing and Johnson & Johnson.
Have them list a dozen companies then look up their ticker symbols and current stock prices. Every day or week, have them look up and record the latest prices. Calculate the gains or losses of each stock. Short-term stock-price movements is not the most meaningful data, but it will help a child understand how the market works.
Follow the companies together, watching them expand internationally, add stores, announce new products or services, and report quarterly sales and earnings. Watch how news affects stock prices.
Once your child knows which companies interest them have them set up a mock investment portfolio. You can sit down together allow him or her to select a company and track the stock for fun. And once they’re ready or have some savings available, you can try investing for real.
The Real Deal – Investing for Children and Teens
Eventually it will be time to help your child actually invest in stocks, bonds, etc. You can open a custodial brokerage account and once your child turns 18, they can open their own brokerage account.
Your child may have enough cash diligently saved up in a bank account by the time he or she is interested in investing. Do not put all their money into a bond or the stock market but invest a third in
each and keep a third in their savings account. This will allow your child to compare the performance of a savings bond, stocks of his or her choosing and the interest from a bank account.
If your child does not have any of their own money, you have two options. You can use $100 of your own money to open a discount brokerage account for your child to make investments through, or you can continue to use an artificial portfolio of stocks that your child wants to buy some day. In the latter case, you will need to find ways to maintain your child’s motivation.
Build Financial Literacy While Starting Their Financial Safety Net
If you can pick stocks together and track them when your children are young, they will get a sense of the up-and-down cycles that the stock market goes through. This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic.
During all this, you want to allow your child to make real decisions and take real risks. Yes, your child may lose money, but the purpose of this exercise is to familiarize your child with investing. Your child may not make a fortune, but the experience of gaining and losing money is almost as valuable. Teach your child how to start investing today!