Are you teaching your children about investing? As they become aware of money and other financial concepts, it's important to familiarize them with investing and arm them with the know-how and tools to take with them into adult life.
Children mature at different rates, of course, so it may be a while before they’re ready to tackle concepts such as portfolio creation and asset allocation. But you can teach them the basics of investing when they are quite young.
Explain the relationship between risk and reward well before they start reviewing company profiles online. Let’s sketch a brief picture of two common investments to illustrate these concepts: stocks and bonds.
- Opening your child's eyes slowly to how markets work will demystify the process of investing and make it feel more accessible to them when they’re older.
- Start by teaching them the basics of risk versus reward, stocks and bonds, and profits and losses.
- If you own stocks, explain why you chose to invest in those companies and consider including your child in keeping an eye on the stock and company news.
- Let your child pick out a stock and either buy a few shares for them or set up a model portfolio so they can make some trades on their own.
- As they get older, encourage your kids to invest their money in a mix of stocks, bonds, and a savings account that you can help manage while they take the lead.
Discuss Stocks and Bonds
One of the first ways we introduce our kids to finances is by opening a savings account for them. But don't just stop there. Introduce them to how stocks and bonds work.
Stocks are classified as high-risk investments. But along with that comes the potential for high returns. Explain that a stock’s value can go up and down and that you can't always predict the associated risks.
For instance, growth and profitability can boost their value while negative news can send it down. Still, these events are outliers, which means the stock market has risen consistently in the last hundred years, offering solid returns.
If someone has given your child a gift of savings bonds, it can be a great jumping-off point to explain how this sort of debt security works. Remember, a bond is a low-risk, low-return investment. Bonds generally pay a small amount over the prime interest rate and are backed by stable institutions, usually banks or governments.
You can introduce your kids to these investments by telling them about purchasing lower-rated bonds that offer better returns. Make sure you advise them of the potential for default and that they can't necessarily count on getting the income they may expect.
Keep Your Child’s Attention
One of the best ways to get your child(ren) interested is by getting their attention with things they (and you) may already know. Get them into the spirit by teaching them about popular companies like Nike or Apple. Or, if they're interested in planes, you may want to introduce them to a company like Boeing. If you own stocks, consider showing them the companies that make up your portfolio.
Take the time to explore the investor relations pages of different companies together to learn more about what the company makes, how much it earned that year, and how many people work there. Then ask your child what company stock they would like to buy. Young as they are, kids often know corporate names and have favorite firms. Disney may be popular with some children.
Once you introduce your kids to basic concepts, sit down and let them select a company. If you have the money, buy a few shares in the stock and then check the investment together at least once a week to show how it can rise or fall. If you don't want to take that risk, consider making a model online portfolio and tracking stocks for fun, without the expense of purchasing shares. You can start out with Investopedia's Stock Market Simulator, which is free to join and use.
If you pick stocks with your children when they are young, they’ll experience the up-and-down cycles of the markets. This may better prepare them for the reality of fluctuations and help them make informed decisions when they grow up.
Let Your Child Invest
Give them the basics of investing when your kids are younger. As their knowledge expands, provide them with an in-depth explanation of stocks and other investments. You want to let a child buy their own stocks at some point, especially if they have some cash in a savings account. Part of teaching them is ensuring they don't put all their eggs in one basket, so suggest investing a third in each and keeping a third in savings. This also helps them compare the returns of different investments.
But what if your child doesn't have any money to participate? There are a couple of options:
- You can use your own cash to open a small brokerage account where your child can make investments
- You can build a model portfolio of stocks that your child wants to buy someday
There are several ways to open a brokerage account for a minor. Another thing to decide is whether you want to introduce your child through an online broker—here are some that we think are especially good for beginners. Depending on the rules of the firm, an adult open a custodial brokerage account in the name of a minor and give that minor the right to trade in it online. The adult would remain the official custodian. As with anything else, check with a tax expert for the best option before you start.
In the latter case, you may need to find innovative ways to maintain their interest when there's no cash involved.
The Influence of GameStop
The heavy trading in GameStop during the winter of 2020 taught many kids about investing, according to The Washington Post. In January 2021, the video game retailer's stock became heavily shorted, leading to heavy price increases and volatility and, ultimately, major losses for many investors. At one point, the company lost 70% of its value in two days.
According to the outlet, many youngsters heard about the news on YouTube and from friends. that parents were using it as a teaching moment. In fact, one 10-year-old who got $60 worth of GameStop stock for Kwanzaa saw it grow to $3,200 before selling it in time. Walking through what happened and why is a good way to make the excitement and risks of investing come alive for young investors.
When Is the Best Time to Introduce My Kids to Finances?
The earlier you start teaching your kids about finances, the better. You may want to start by opening a savings account. Get them excited about saving their money by putting it into the account and watching it grow. As they get older, you can open the dialogue up to more significant topics, like stocks and bonds. At some point, it may be wise to show them your investments and either let them use a simulator or open an investment account for them, too. Taking a hands-on approach when they're ready will expose them to the ups and downs of the market. Be sure you monitor them so there are no surprises.
Why Is Financial Literacy Important for Kids?
Financial literacy is important for everyone. But it may be even more important for young children. Teaching them about money, money management, and investing at an early age can help them achieve financial freedom and success later in life. Starting small with teaching them about saving can lead to more in-depth topics like the basics of investing, which may help them make more meaningful decisions about their money and finances as they get older.
Can I Open a Trading Account for My Child?
If you're confident enough, you can open a trading account for your child. Most brokerages require you to open a custodial account. This type of account lets you open it in the name of your child and give them the right to trade online. Keep in mind, though, that you are the one who is ultimately responsible to manage and invest in it.
The Bottom Line
It’s important to allow your child to make real decisions and take real risks. Money may be lost—not on the likes of GameStop, one hopes—but the purpose of the exercise is to familiarize them with investing, and part of that is learning that investments have advantages and disadvantages. Whatever the outcome, the experience of following their investments and gaining and losing money—whether actual or theoretical—will be invaluable.