Have you ever heard a news report about someone named Dow Jones? Also, what is a NASDAQ, and is it contagious?
If you’re one of many who think that the stock market is a place you go and pick up stocks, you’re in luck! Today you’ll learn some stock market basics that will help you build a solid financial foundation for your future. But first, you need a better understanding of what the stock market’s all about and how it can help you build wealth.
Understanding the Basics First
Investing in the stock market is just one way you can grow your wealth. And you don’t have to wait until you’re an adult. Even as a kid, you can open a custodial investment account with your parents and start growing your money from an early age.
A stock market isn’t like a grocery store, where you can simply walk in, put items in a shopping cart, and check out at the register. Instead, you can think of it as a place where people buy and sell on our behalf.
Of course, not just anyone can trade on your behalf. The people who do this are called traders. They’re registered with the Securities and Exchange Commission (SEC), which is the agency that regulates the stock market.
Stock Market FAQs
It’s true; the stock market can get pretty technical. But we’re not trying to put you to sleep or overwhelm you here. To keep it simple, we’ve rounded up some of the most frequently asked questions on the subject. These will help you better understand the stock market and how it works.
What’s a stock?
Stocks are tiny pieces of ownership in a company. That means that you and whoever else has bought stock are co-owners (stockholders) of that company! Amazing, right?
What is a stock market?
A stock market is where those stocks are bought and sold – aka traded. Why “traded”? Because what’s happening is that someone who no longer wants their stock is trading it for money. And someone who wants it is offering money for it. Kinda like an auction.
How many stock markets (aka exchanges) are there in the US?
The major stock exchanges in the US are:
- NASDAQ (National Association of Securities Dealers Automated Quotations)
- NYSE (New York Stock Exchange)
- AMEX ( American Stock Exchange)
What can be bought and sold on the stock market?
- Stocks
- Bonds
- Mutual Funds
- Exchange Traded Funds (ETFs)
- Derivatives (These are fancy financial contracts that get their value from another asset, group of assets, or a benchmark.)
What’s a stock index?
It’s a snapshot that tracks the stock market as a whole instead of individual stocks. It gives you a general idea of how the market is doing. You know that graph shown on TV when the news reporter says, “The market is down” or “The market is up?” That’s the one!
There are a few different stock indices:
- Dow Jones Industrial Average (DOW)
- S&P 500 (Standard and Poor’s 500)
- NASDAQ (National Association of Securities Dealers Automated Quotations)
Can I buy/sell/hold stock if I’m under 18?
If you want to start investing in stocks, you’ll need your own brokerage account. Since those can only be opened by people over the age of 18, you’d need to set up a custodial account with your parents.
This is sort of a joint account that your parents control for you until you become an adult. It’s important to point out that if you don’t have any experience trading in the market and your parents are not finance experts either; you’re better off opening your account through a financial planner who can guide your investment decisions.
By purchasing stock, you are part of a community of stockholders for that company that can reap the benefits of the company’s growth. The more popular or in demand a company is, the higher its stock price becomes.
But, by the same token, companies sometimes lose money or don’t do as well as expected. In those cases, the business’s value goes down, which reflects in the value of your stocks.
Rule of thumb: Risk goes both ways. You can lose just as much as you can earn. If you can’t afford to lose it, don’t invest it.
Compound Interest
With stocks and other investments, the longer you’re in the market, the greater chance you have of your stocks earning an amazing little thing called compound interest.
This means that when you make an investment, that investment earns a profit/interest, and every year, your interest earns interest. The more years you’re in the game, the better.
For example: If you invest $100 and just let it sit there, without adding anything else…
With the average return of 10%:
- At the end of Year 1, you’ll have a total of $110!
- At the end of Year 2, you’ll have $121
- At the end of Year 3, you’ll have $133.10
- At the end of Year 4, $146.41
- At the end of Year 5, $161.05
Now, imagine the potential if you invest monthly?!
Check out this Compound Interest Calculator from the SEC to get a better idea of what you’ll need to invest to reach your long-term financial goals.
Fun Activities to Help You Learn More
There are lots of ways to learn about the stock market. Here are just a few to get you started.
Stock Market Books For Kids
You know we love reading! If you’re a bit of a book worm yourself, check out these books that can help you learn more about the stock market. Head to our entire library of investing books for kids for more recommendations!
In Investing for Kids: How to Save, Invest and Grow Money, you can get a better sense of what investing’s all about and how to get started. It’s a great choice for kids who’ve outgrown their piggy bank!
Of course, it takes time to save enough money to open your investment account. That’s why How to Turn $100 into $1,000,000: Earn! Save! Invest! is a great guide for kids to do just that: earn money, set it aside, and then put it to work for you.
Stock Market Online Games for Kids
If games are more your vibe, check out The Stock Market Game. This fun simulation allows you to practice being in the stock market without any real risk. It even gives you an imaginary $100,000 to invest virtually.
Can’t get enough of online games? Check out the, Build Your Stax for more simulation goodness! You can play it solo or create a group for hours of entertainment with your friends.
Stock Market Online Games for Kids
If you’re looking for a fun new activity for game night, give Big Money a try. It’s an entertaining board game for kids 8+ that’s easy to play and exciting for all. With its short rounds that last around 40 minutes, you’ll find yourself playing this game over and over again.
If you want to become a trading master one day, Bulls and Bears is a great place to start. You’ll learn about the different types of assets, investment strategies, and build your financial IQ. This one’s for kids 12+ and parents who want a fun way to develop their money skills.
Are You Ready To Take On the Stock Market?
You should be feeling pretty good by now. You definitely know that the Dow Jones isn’t a person and that you can’t just walk into a stock market. You can feel confident that you know the basics and are ready to make some stock market moves – whether that’s virtually through online gaming or IRL with the help of a financial advisor.
Ultimately, the goal of the stock market is to buy a stock, hold it for a while, and then sell it for more than you paid for it. If you do this a few times over, through the years, you could set yourself up for a comfortable future.
Check out our Investing for Kids section for more advice on the basics of investing!
