Are you wondering how to teach kids investing? Investing is a valuable life skill that can set them up for financial success in the future. Even though kids grow and learn at their own pace, you can start teaching them the basics of investing at a young age.
Before they dive into complex topics like building portfolios and managing assets, you can help them grasp the fundamental concepts of investing.
One crucial lesson to start with is understanding the relationship between risk and reward. We’ll begin by painting a simple picture of two common investments: stocks and bonds.
| How to Teach Kids Investing |
|---|
| 1. Gradually introduce your child to financial markets to demystify investing as they grow. |
| 2. Start with teaching basics: risk and reward, stocks and bonds, profits and losses. |
| 3. If you own stocks, explain your choices and involve them in keeping up with stock and company news. |
| 4. Let your child choose a stock they’re interested in; you can buy shares or set up a practice portfolio for mock trades. |
| 5. As they grow older and more comfortable, encourage them to invest in a mix of stocks, bonds, and a savings account. Provide guidance as they take the lead in managing their investments. |
What you'll learn:
β€ How to Teach Stocks and Bonds to Kids
As we begin to introduce our kids to the world of finance, it’s common to open a savings account for them. However, it’s important to go a step further and acquaint them with the basics of stocks and bonds.
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Teaching Stocks
Stocks are often seen as higher-risk investments, but they also come with the potential for significant returns.
Explain to your child that the value of a stock can go up and down, and these fluctuations can be challenging to predict.
For instance, positive developments like growth and profitability can drive stock prices higher, while negative news can cause them to drop.
It’s crucial to emphasize that these extreme events are exceptions, and historically, the stock market has shown consistent growth and delivered solid returns over the past century.
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Teaching Bonds
If your child has received a financial gift like a U.S. savings bond or a certificate of deposit (CD), this can serve as an excellent starting point to discuss how bonds work. It’s important to convey that bonds are generally low-risk, low-return investments.
They typically offer returns slightly above the prime interest rate and are backed by stable institutions, often banks or governments.
You can introduce your children to these investments by explaining the possibility of purchasing bonds with lower credit ratings that provide higher returns.
However, it’s crucial to make them aware of the potential for default, which means they may not receive the expected income. Teaching them about the differences between stocks and bonds can help them understand various investment options and their associated risks and rewards.
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β€ How to Keep Kids Engaged
To capture your child’s attention and pique their interest in investing, start with things they, and even you, may already know. Make it fun by introducing them to well-known companies like Nike, Apple, or Boeing if they’re into planes. If you own stocks, show them the companies in your portfolio.
Spend time together exploring the investor relations pages of different companies. Learn about what the company produces, how much it earned, and how many people work there.
Then, ask your child which company’s stock they’d like to own. Even at a young age, children often recognize corporate names and have favorite companies, like Disney.
Once you’ve introduced them to the basics, sit down together and let them choose a company. If you have the means, consider buying a few shares of that stock. Then, check the investment together at least once a week to show how its value can rise and fall.
If you’re not ready to take that financial risk, you can create a model portfolio online and track stocks for fun without actually purchasing shares. A great starting point is Investopedia’s Stock Market Simulator, which is free to use.
By involving your children in picking stocks at a young age, they’ll gain exposure to the market’s ups and downs. This experience can better prepare them for the reality of market fluctuations and help them make informed decisions as they grow up.
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β€ How to Encourage Kids to Invest
Start by teaching your kids the basics of investing when they’re young. As their understanding grows, offer more detailed explanations about stocks and other investment options.
Eventually, consider letting your child purchase their own stocks, especially if they have money in a savings account.
It’s essential to teach them not to put all their money into one investment. Suggest dividing their funds into thirds: one-third in stocks, one-third in other investments, and one-third in savings. This way, they can compare the returns from different investments.
But what if your child doesn’t have any money to invest? Here are a couple of options:
- You can use your own money to open a small brokerage account, allowing your child to make investments.
- You can create a model portfolio of stocks that your child aspires to buy in the future.
Opening a brokerage account for a minor can be done in several ways. You might decide to introduce your child to investing through an online broker, which is beginner-friendly.
Depending on the brokerage’s rules, an adult can open a custodial brokerage account in the minor’s name and grant them permission to trade online.
However, the adult will remain the official custodian. It’s essential to consult with a tax expert to determine the best approach before getting started.
In situations where there’s no actual cash involved, you may need to come up with creative ways to maintain your child’s interest in investing.
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β€ How to Teach Kids Investing FAQ
When to teach kids investing?
The sooner you begin teaching your kids about finances, the better. Start by opening a savings account to get them excited about saving money and watching it grow. As they grow older, gradually introduce more significant financial topics, such as stocks and bonds.
At some point, consider showing them your investments and either let them use a financial simulator or open an investment account for them.
Taking a hands-on approach when they’re ready will expose them to the ups and downs of the market. It’s important to monitor their progress to ensure there are no surprises.
Why kids need to learn investing?
Financial literacy is essential for everyone, but it holds even more significance for young children. Teaching them about money, managing finances, and investing from an early age can pave the way for financial freedom and success in the future.
Starting with basic lessons about saving can lead to more advanced topics like the fundamentals of investing. These early lessons can help them make informed decisions about money and finances as they grow older.
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How to open investing account for kids?
If you feel confident, you can indeed open a trading account for your child. Most brokerages offer custodial accounts, allowing you to open an account in your child’s name and grant them online trading access.
It’s essential to remember that, despite their ownership, you will be responsible for managing and investing in the account on their behalf.
β€ Final thoughts
It’s crucial to let your child make real decisions and take real risks when it comes to investing. While we hope they won’t experience big losses, the main goal is to familiarize them with the world of investing.
Part of this learning process involves understanding that investments come with both advantages and disadvantages.
Regardless of the outcome, the experience of actively monitoring their investments and witnessing gains and losses, whether actual or theoretical, is invaluable.
This hands-on experience will help them develop a deeper understanding of how investments work and the potential consequences of their decisions, setting a solid foundation for their financial future.
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