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When should I teach my children about investing in the stock market?

“Train up a child in the way he should go: and when he is old, he will not depart from it.”

This Biblical verse is an ample supporting argument for imparting investment education to children. Given the exposure children have today, it isn’t a tall order for them to get started on investing at a very young age. In fact, learning the tricks of the trade quite early gives them an edge and equip them to be better investors when they have some money of their own to invest.

Teaching kids the habit of saving is widely prevalent, but that is not the case with investing.

Many parents attempt to inculcate the habit of saving in children as young as preschoolers by giving them pocket money or rewarding them with small monetary compensation for helping with small domestic chores.

They are then taught the virtues of saving the little money in their possession. Saving is made attractive to them by getting them piggy banks of different shapes and sizes, with some of them even modeled after their favorite cartoon characters.

The same parents, who show eagerness and hurry in getting their children started with saving, do not exude the same degree of enthusiasm in introducing investing to their children. Probably, the risk element involved is the reason to blame, or it might be due to the misconception that both boil down to the same thing.

Though in many contexts, both terms are interchangeably used, there is a sea of difference between both.

Saving Vs Investing

Saving is the act of setting aside some hard cash as a providence measure. As an extension, it can also mean putting money in a checking or saving accounts, which is secured by the FDIC or investing in highly liquid securities such as U.S. Treasury bills.

On the other hand, investing is using the money to buy an asset class that generates a relatively safe and acceptable rate of return over time. Invested money earns higher returns than the saved money, although there is an element of risk involved in the former. Under unfavorable market conditions, there is the danger of even the entire investment dollars being wiped out.

Kids’ Walk Down The Street

Although there are several avenues or asset classes for investment, such as stocks, bonds, commodities, currencies and the whole categories of derivatives, the easiest asset class one can use to get kids acclimatized with investing is an equity or stock.

Stocks, however, are relatively risky compared to bonds, commodities such as gold and some safe haven currencies. However, children can connect better with stocks due to their association with companies, whose products and services children are familiar with.

How young is too young to learn to invest?

Prolific and astute billionaire investor Warren Buffett has a tale to tell regarding his earliest investment, which is worth recounting every time one talks about investing.  At an age of 11 years, Buffett bought his first stock from the money he saved out of working in the family grocery store.

His interest in investing can be traced back to what he gleaned out of the conversations among investors, who came to the small stock broking firm his father owned. He did odd jobs while he was a teen and used the money he saved to buy stocks of local companies.

Buffett’s first tryst with investment came in the year 1941. A lot of things have changed between then and now, with children of today precocious, independent, and having access to all modern communication devices and, are therefore well informed.

It wouldn’t be a stretch if one says, investment education can be imparted to children as early as their elementary school year, which is between 5 and 11 years. This age criterion needn’t be strict, given no two individuals are alike in all aspects.

How to Get The Children Started?

Investment should be made as a family activity, with discussions going all around concerning the companies forming part of the portfolio, the moves of assets that are part of the portfolio, returns, both targeted and actual, etc.

When parents discuss their holdings with children, they should help them understand that investment in stocks is a risky business and therefore, it requires thorough background research and a clear strategy to avert or minimize any potential losses.

That said, the language should be kept simple, without using hardcore investing jargons. Explain to them that it is merely a form of deploying the money they have saved in something, which can fetch you incremental returns.

One can also take the children to annual shareholders’ meeting of local companies to get them interested.

Include them in stock picking by asking them which company’s stock they would prefer to own. Kids may not have full knowledge about the whole gamut of industries and sectors. At least they will be familiar with companies such as Disney, Nike, Nintendo etc, whose products they are familiar with.

With these fledgling steps, though children may not get the whole hang of things, for sure, they pick up the basics.

May be before they are ready to go, you can make the children play stock market simulation games with paper money. At this point, you can do all the hand-holding children would need, walking them through the basics of investing.

Once children gain some familiarity by watching the parents invest, and they accumulate some money for investing, parents can explain the concept of a portfolio, which serves the purpose of diversification and risk minimization.

‘Getting them while they’re young’ should be the mantra one should follow, while walking the children through the risky maze of Wall Street. Eventually, when these kids grow up, an early induction will go a long way toward transforming them into seasoned investors, who can make safe and high return bets.

Who knows, you could be nurturing one of the future Buffetts!