Teaching your children the tricks of the trade when it comes to investing can give them an edge later in life. Simple lessons could equip them to be better investors when they have some money of their own to invest. Encouraging saving and budgeting habits in kids is commonplace, but less emphasis is put on investing for kids. Read on to learn how to introduce your kids to the stock market.
Investing for Kids Early in Life Can Improve Their Financial Success
Investing for kids at an early age can be one of the best investments parents make. Not only does it help prepare them for financial success later in life, but it also reinforces good habits and teaches them essential money management skills while they're still young.
By starting to invest for kids when they’re young, parents are able to reap the benefits of compound interest on their investments which can add up to a significant amount over time. Investing early also helps parents set a good example for their children, demonstrating that money can be used to build wealth and achieve financial goals.
Investment Accounts for Kids
Before beginning the lessons on the stock market, you'll want to make sure an investment account is the right choice for your child.
Saving vs. Investing
If you want to wait until your child has money set aside to teach them about investing, you could help them open a savings account. This would allow them to practice managing their money while working to save for investments in a few years.
On the other hand, invested money earns higher returns than saved money, although there is an element of risk involved in the former. If you think your child is ready to handle this concept of risk or has enough money saved away to learn it on their own, it may be a good time to teach them about investing.
You can also use debit cards to teach your kids about wise spending. These days, kids can manage money using something like the Greenlight Debit Card. As a parent, you can register for a Greenlght card, give it to your child and deposit money as needed.
Your child(ren) use the card just like any other debit card, and they can easily access their allowance, money they earned through a job or take payments for babysitting, etc. Greenlight also features budgeting and financial education resources. Kids learn how to do more than just deposit and spend money. Parents never need to worry about lost cash, and kids have just as much spending power as adults.
Asset Classes for Kids
There are several avenues or asset classes for investment, such as stocks, bonds, commodities, currencies and whole categories of derivatives. The easiest asset class for kids is 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 Old Do You Have to Be to Invest in Stocks?
At age 11, prolific and astute billionaire investor Warren Buffett bought his first stock from the money he saved working in his family's grocery store.
He did odd jobs while he was a teen and used the money he saved to buy stocks of local companies. Buffett’s first experience with investment came in the year 1941. Things have changed between then and now, most notably with kids being well informed via modern communication devices.
Depending on the type of brokerage account you open for your child, there may be an age restriction on if they can invest. This is brokerage specific, but parents can usually open a custodial brokerage account for kids under 18 years old.
How Kids Can Start Investing
Investment should be made as a family activity. Kids can join discussions concerning companies that form their portfolio, the moves of those assets, and more. When parents discuss their holdings with children, they should help them understand that investing in stocks is a risky business and therefore, it requires thorough background research and a clear strategy to avert or minimize any potential losses.
Step 1: Describe Investing in Simple Terms
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.
Step 2: Have Them Make a Few Stock Picks
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.
Step 3: Practice With a Simulation
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.
Step 4: Open an Online Brokerage Account
For children that are going to build a simple portfolio and hold that position for a number of years, a beginner youth account is a great way to go.
Check out more of Benzinga's favorite brokers for opening an investment account.
It's Never Too Early to Plan for the Future
Investing is an amazing way to teach children the importance of money and how our economy functions as well. If you are looking for helpful, educational resources to explain these topics, you can start with how the stock market works.
Frequently Asked Questions
How do you build wealth for kids?
At what age can a child start investing?
While there is no specific age when a child can begin investing in the stock market, there are some important factors to consider before making that decision.
For starters, children under the age of 18 are not legally allowed to open or manage their own brokerage accounts.
Should a 12 year old invest?
When it comes to investing, there are no hard and fast rules about when someone is ready. That said, it can be a great way to teach children the basics of financial literacy and money management. For a 12 year old, this can include learning the different types of investments, understanding the risk and rewards associated with them, and how to track their performance over time.