Making Sense of the Stock Market for Kids
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When it comes to teaching your kids about the stock market, it can pay to start early. Developing financial literacy at a young age may correlate with higher net worth in your 20s and beyond, according to a study by the Brookings Institution—and understanding the stock market can be a key element of financial literacy.
But figuring out how to teach your child about the stock market can be intimidating. One barrier to teaching kids about stocks may be that many adults may not feel entirely comfortable with how the stock market works or how to explain it. The key may be to break down complex topics into simpler ideas that the kids in your life can understand. By gradually introducing these concepts, you’ll be helping kids build long-term money skills that could significantly improve their future—so it’s worth it to take steps to explain the stock market for kids as you foster financial literacy.
How to introduce the idea of saving
A foundational concept in the world of money is the principle and practice of saving. You can make saving a hands-on, visual process for young kids by having them put their coins and dollars in clear jars so they can watch their savings accumulate over time.
Teach your kids to save with purpose by dividing their savings into three jars, labeled wants, needs, and causes. Ask kids to name which of these categories is most important to them, and have them save extra in the jar that matters most.
Also, consider taking the children in your life with you when it’s time to make a purchase, and have them follow you through the process if you purchase something online. Another good practice is to periodically guide them through the process of buying something small with money they’ve saved in their jars. Show them how money can be exchanged for goods and services, and talk about how to compare the cost of one thing to another. Explain that saving a little money at a time means they’ll have money to spend in the future.
How to explain stock basics
You can begin teaching kids about stocks by starting with things they already know. Many kids may be familiar with the names of publicly traded companies that make the products they may already use, including companies like Mattel, Kellogg’s, Nintendo, Disney, and Apple.
Tell your kids that when people invest in stock, they actually invest in a small portion of ownership of a company. When the company performs well, the stock can become more valuable. When the company performs poorly, the stock value tends to decline. When you sell a stock whose value has increased, you can make a profit. And when a company underperforms, the stock’s value can fall—so selling the stock at that point could mean losing money.
As your child begins to learn more complicated math, they may be ready to wrap their heads around more challenging ideas related to investing. For example, you can explain the concept of compounding. Start by telling kids that money in a savings account can earn its own money, called interest. Let kids know that a bank may pay you interest because you’ve put your money in their bank. Then explain that compound interest is money that’s earned based on the initial amount plus previously earned interest. Explain that the amount of interest is usually based on a percentage.
Feel like this is something kids should learn in school? You’re not alone. And some schools and states do include personal finance as part of their curriculum, but usually the amount of time devoted to key concepts is limited—and only provided when kids are in high school, after they’ve already formed key concepts around money. Want your kids to get practice with concepts like this sooner? Encourage your kids’ teachers and schools to implement Stash101, an online simulated banking and investing platform (teachers will love this: it’s free!). And you can get more info about how to teach kids key money concepts by signing up for the upcoming Stash101 for families.
How to explain why people—and kids—may choose to invest
As you’re teaching your kids how the stock market works, talk with them about why people invest in the first place. Explain that investing can be a powerful way to help build wealth over the long term—and it’s something that can help people pay for goals, such as going to college, buying a house, or retiring from work.
Let kids know that over the long term, average stock market returns have historically been higher than the interest your money earns in a savings account, so investing in stocks can be a way for people to build wealth to achieve their long-term goals.
Explain that another reason people invest is to overcome inflation. Over time, the prices of goods and services tend to go up, and the value of money tends to decrease. Use a practical example: Almost 90 years ago, a nickel could get you a 12-ounce bottle of Pepsi. Ask your kids to think of something they could buy for a nickel today. Tell kids that if they simply kept their money in a jar at home, over time it would likely be worth less and less in relation to what things cost. However, if they invested that money, the potential gains they could make could help their savings increase in value over time, instead of decrease.
Opening a custodial account for your kids
To give your child a more in-depth experience of buying and selling stocks, consider opening a custodial brokerage account for them. With a custodial account, you can make monetary gifts and retain control of investments and withdrawals until your child reaches age 18 or 21, depending on the state in which you live.
Unlike other accounts for children, such as 529 plans for college education, custodial accounts offer flexibility in how they’re used once your child is an adult. For example, your child could use the money to buy a car, travel the world, or open a business.
You can use a custodial account as an educational opportunity to help your child learn to make investment decisions. Within the account, you can identify individual stocks your kids might be interested in, since owning a piece of the company behind their favorite toys or movies may help fuel an enthusiasm for investing. Consider picking out some index funds or low-cost ETFs on their behalf, and talk about the importance of diversification. Aim to balance investments based on kids’ interests and a healthy, diversified approach that will stand to gain value over time.
The importance of teaching kids about stocks
Helping the kids in your life develop an understanding of the stock market can demystify investing and put a powerful wealth-building tool in their hands. Introducing age-appropriate concepts to your children prepares them to be responsible investors and gives them a leg up as they get older. And it can be easier to make learning about finance fun when you help kids invest in the stocks of companies they love.
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