Teaching your kids about investing is a powerful way to provide them life-changing skills. As soon as your child is familiar with money and other simple financial concepts, they’re ready to start learning about investing. In fact, the sooner you start teaching them, the more time they’ll have for their money to grow. By the time they become adults, a modest investment could turn into a significant amount of money.
Many parents feel intimidated to teach their kids about investment. But the reality is that you don’t need to be a financial expert to teach your kids about investing. With our simple and fun techniques, you can help your child grasp essential investment concepts and get them started in their own financial journey. Here’s our best advice to help you out with this process:
Explaining the Importance of Investing Their Own Money
Investing lessons start with a critical concept: investments are financial tools that help investors grow their money and accomplish their goals. But investing isn’t a get-rich-quick strategy. It takes time, strategy, and knowledge.
Whether your child is drawn to the stock market, real estate, or crypto, they need to get a solid financial understanding as a base for their investing. Once they understand how money works and the different investment options available to them, your child will be able to make more educated decisions and find advisors to help them along the way.
Teaching Them How to Smartly Invest their Own Money
To help your kids set goals for their investments, start by talking to them about what would be exciting and important to have in the future. Would they like to buy a home, travel the world, or have money for a college education?
With goals, you can encourage your child to develop good financial habits. Help your kids split the money they make — through chores, jobs, and even gifts — into spending and saving. This is a great way to teach them that saving money gets them one step closer to their goals. Delayed gratification is an important lesson for any investor!
As your children’s savings grow, it’s time to get into the basic concepts of investing. Remember, investing can get very complicated very quickly, so it’s vital to keep it simple and always speak their language.
How to Explain Stocks to Your Child
Start by explaining to your child that investing money in the stock market is essential for building wealth. You can discuss how stocks are pieces of paper (real or virtual) that represent ownership in a company. So, when people buy stocks in a company, they become one of the company’s owners, or shareholders.
To make the concept less abstract, you can explain to your kids that as shareholders, they make money by selling the stock at a higher price than what they bought it for. Also, introduce the idea that stocks can be risky investments and that there are no guarantees of profits when you buy stocks.
You can also give them an example of a company they know and compare two possible scenarios. For instance, imagine the cost of a stock of Kellogg’s is $100, and you decide to buy one. After a couple of months, Kellogg’s launches a new delicious fruity cereal. Two things can happen next:
Scenario 1: People get very excited about the new cereal and buy tons of it. Kellogg’s makes big bucks. People see the company is doing great and buy lots of stocks, which makes their price go up to $130. If you sell your stock, you will earn $30 because you paid $100 for it and sold it for $130!
Scenario 2: People get very excited about the new cereal, but when they try it, they don’t like it, so they stop buying it. Kellogg’s loses big bucks. People see the company is not doing well, and those who own their stocks start selling them, which makes their price go down to $70. If you sell your stock, you will lose $30 because you paid $100 for it and sold it for $70!
How to Explain Bonds to Your Child
Once your little one grasps the concept of stocks, you can move on to bonds. A good way to introduce the concept is by explaining that bonds are also pieces of paper (real or virtual). But, unlike stocks, bonds pay an interest rate. A person who buys bonds is lending the company or government money in return of interest. This money gets paid to investors at regular intervals.
Using simple math, you can explain to your child that interest rates are a percentage of the initial investment. If you have a $10 bond that will pay a 10% interest rate in one year, your child is guaranteed to get $11 a year later. This is a great way to show how bonds are less risky than stocks, but the return on investment is also lower.
Opening an Investment Account
To make the concept of investing more interactive, you can try a stock market simulator with your kids. This is a great first step that helps introduce your child to the stock market without putting any real money at risk.
Many paper trading options can give children a more hands-on experience of investing that feels realistic and exciting. Each of you could buy different stocks, compare earnings and losses, and discuss mistakes!
Once your kids have played around with their paper trading account and saved a good amount of money, you can set them up for real investments through a brokerage account. Here’s what you need to know before opening one:
- Minor brokerage accounts are often referred to as a custodial or a UGMA/UTMA account. These are accounts that you open at a financial institution, mutual funds company, or brokerage firm. They are set-up and controlled by an adult, on behalf of a minor. Kids can take full control of the account when they reach the legal age of adulthood in their state.
- If your child earns income, you can consider a custodial Roth IRA. They’re a flexible retirement tool that allows your little one to start saving for their future and enjoy the fruits of their labor when they’re older. These are especially practical if you have a young entrepreneur who could benefit from tax-free growth of their money.
- The best brokerage accounts don’t charge fees and have no minimum initial deposit. They offer online investment education for kids, including investing tutorials and paper trading. The process for opening a custodial account is easy and can be done online. All you need is basic information about you and your child — legal name, date of birth, social security number and contact information.
Deciding What to Invest In
A fundamental principle in investing is to put money in companies you understand. You can get your kids excited about investing by asking them what companies they like or are curious about, and having them join you in researching their stock prices.
When your kids have chosen the company they would like to invest in, buy one or two individual stocks. Review the investment with them each week to see how it increases or decreases. Checking their investment regularly will inspire them to talk about why the stocks are moving and help them become more informed investors in the future.
When teaching kids how to build investment portfolios, a common practice is focusing on mutual funds, low-cost index funds, or ETFs. These are good alternatives to individual stocks and an easy way to diversify your child’s portfolio. Spreading your child’s investments will also help you and your kids avoid the hassle of picking the “right” stock to invest in.
It’s also important to introduce your child to the concept of financial planning. With the help of an expert, your child can make better financial decisions and entrust the management of their money to a professional. The more your child knows about finance, the easier it will be to find the right advisor to trust.
Helping Them Learn What Not to Do
The most important lesson to teach your children is to avoid emotional decisions when it comes to investments. That’s why research is so important for investors to make educated choices and understand the ins and outs of the market.
Putting all your eggs in one basket is another big no-no of investing. Kids should also learn that people invest in things they think will make them more money, but there is no guarantee that investments always go as planned. Having a long-term outlook on investments is the key to building sustainable wealth.
Setting a Good Example
Kids pick up their parents’ habits. So, don’t be shy to have open conversations with your children about money and financial planning. These talks can give your kids another chance to learn about investing.
You can talk to them about your own savings and investment projects. Explain why you are setting money aside and what benefits you will have in the future. Describe and involve them in your financial activities. This is an organic way for your children to adopt your good habits and learn the key concepts you want them to pick up!
If you’re not comfortable with it, you don’t have to share actual numbers with your kids. Be sure to share financial concepts and the values about money you want them to have.
Here are some financial terms — in words that kids can understand — that every young investor should know:
- Investment: Something that you put your money into because you believe will earn you a profit in the future.
- Stock: A piece of a company. When you own a stock of a company, you own a small piece of its business. Every stock has a price and that price can go up or down, depending on what’s happening at the company.
- Mutual Funds: A type of investment that pools funds from many investors to buy a variety of stocks, bonds, or other types of securities. The fund manager decides how the money is invested and charges a fee for this service. These funds often have a minimum investment amount.
- Exchange Traded Fund: Also known as ETFs, these are pooled funds that invest in a variety of securities. Like mutual funds ETFs are also managed by professionals, but don’t have a minimum investment requirement.
- Index Funds: A fund with a variety of securities that is designed to match a stock market index, such as the S&P 500. These funds provide broad exposure to the market and diversification at a low cost.
Books for Parents to Teaching Kids About Investing
Are you looking for more resources to teach your kids about investing? Check out these books that’ll take your own knowledge to the next level and help you give your child a solid financial education. Check out our roundup of the best kids’ money books for parents for all of our recommendations!
Teaching Kids to Buy Stocks: Stories and Lessons for Grown-Ups is a must-have to teach your kids all they need to know about the stock market and stock picking. Best of all, it puts concepts in simple and easy-to-understand language.
Investing in Stocks for Beginners takes you through the ins and outs of investing. It includes real-life examples of good and bad investments that you can share with your kids.
Rich Kids Made Simple will teach you the fundamentals of investing, plus 5 powerful money rules to help your kids succeed financially.
Make Your Kid A Money Genius is a step-by-step guide to help you teach your kids how to manage money smartly and invest like pros.
As you’ve seen, you don’t have to be a financial guru to teach your kids about investing! Getting your children started with investments is an opportunity for you to brush up on your own knowledge or even open investment accounts for yourself. No matter where you are on your own financial journey, teaching your children about investing is the key to building generational wealth and taking control of their financial future from an early age.