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
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Overview: 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 the 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.
Asset classes for kids
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 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 tryst with investment came in the year 1941. A lot of 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 restricting 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: Select an online brokerage
For children that are going to build a simple portfolio and hold that position for a number of years, a brokerage for beginners is a great way to go. Check out our favorites below.
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.