Your child may notice that lower interest rates earn much less money over time than higher interest rates. This observation can open a conversation about other ways to put your money to work. Though investing is covered in our Teaching Financial Literacy To Teens guide, most tweens are ready to learn the basics of the stock market, and the opportunity for higher returns.
The stock market is a place where people buy and sell (or trade) stocks and other financial products. Some of this trading takes place in a physical location, and other trading occurs over the Internet (electronically). Stocks, by definition, are units of ownership in a company, but most kids won't necessarily understand that explanation. Instead, explain that people who buy stock in a company own a little piece of that company. Give an example they can relate to: Disney (NYSE:DIS), DreamWorks Animation (Nasdaq:DWA), PetSmart (Nasdaq:PETM), McDonald's (NYSE:MCD) and Hasbro (Nasdaq:HAS), for example.
People buy and sell stocks to try to make money; in many cases, people can earn more money than they would by keeping their money in an interest earning bank account. Explain that while the money in a bank account is safe (you can't lose it), any money in the stock market is at risk: you could lose all the money you used to buy stocks. No- and low-risk investments (like putting your money in a bank account) offer low returns; higher-risk investments (like the stock market) give you the opportunity to make more money, but with no guarantees.
If the company's profits increase, the value of your stock will increase also. Conversely - and this is important - if the company's profits fall, so will the value of your stock. If you sell your stock for more than you bought it, you can make a profit. If you sell your stock for less than you paid for it, you will have a loss (i.e., you will lose money). The company's stock price changes every single day and usually even every single second throughout the trading session.
Your child might ask, "Why would a company want a bunch of people to own little pieces of it?" You can explains that companies sell stock to get money to do things such as improve their existing products, create new products, hire more employees and research new technologies.
|Chart courtesy Google Finance|
If possible, show your child a stock chart (such as the one above for Disney), pointing out how prices change over time. Financial news sites, such as Yahoo! Finance (www.finance.yahoo.com) and Google Finance (www.google.com/finance) provide historical stock charts and related information. Review several charts from various companies and ask your child questions such as, "If you owned stock in this company, what do you think happened to the value when price dropped on this day?" or "What would have happened to your stock's value when price increased on this day?" Explain that many people own more than one share of stock in any particular company: if you own 100 shares, for example, and the stock price increased by $1, your position would have increased in value by $100. Make sure you point out what else can happen: if you own 100 shares and the stock price fell by $1, your position would have lost $100 of value.
Depending on your child's interest, you can explain that different people have different goals with the stock market. Some people, called investors, will buy a stock and hold onto it for a long time, hoping that price will slowly but steadily rise over time. Other people, called traders, may buy a stock one day and sell it the next, or even over just a few seconds. These people try to capture small and frequent gains, rather than the slow and steady gains investors look for.
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