For long-term financial stability, children need to learn how to invest their money so that as adults they have a cushion against inflation and a source of funds that is independent from any job. While the stock market has plenty of ups and downs, writes "USA Today" financial reporter Matt Krantz, holding stocks for long periods of time can still result in good returns. Kranz reports that historical data show that stocks held for several decades have earned an average of about 9.3 percent a year since 1928, according to the financial website IFA.com, despite periods of recession. So teaching your kids stock market basics can help to make them comfortable with a way to keep them financially secure throughout their lives.
Buy your child a few shares of stock in a company that he is interested in, such as Disney, Coca-Cola or McDonald’s. Let him know that he now has a tiny part of this business and explain to him how it works. Young children sometimes think that owning stock brings benefits, such as trips to Disneyland or free fast food, so it helps if they understand from the outset that this is not part of the deal.Step 2
Track the stock’s price on a regular basis. Part of teaching kids about the stock market is helping them to understand that market fluctuations are normal. If the value of his stock changes, discuss with your child what would happen if he sold his stock at that point in time. Also talk about the value of holding onto his investment: selling stock when it is low means a loss, but selling it when it is high means the end of his investment.Step 3
Look at stock charts with your child, and show him how to evaluate what his stock is doing. Show him how charts make it easier to identify trends, despite any ups and downs of the market.Step 4
Help your child set up a simulated trading account so he can practice trading stocks online without risking any actual money. Many brokerage firms and other sites offer this type of mock trading game. Your child can choose stocks and experience both success and failure. Such practice sites often use a game format to make them more kid-friendly.Step 5
Introduce him to the concept of diversifying, so that he spreads his risk over several stocks, instead of buying just one. Use prices and trends over time to show him why it’s a good idea.Step 6
Let you child pick the stock when you are ready to increase his holdings. If you think he is making a bad choice, discuss it with him and give him your reasons. Offer him some options you think are better choices and explain your thinking to him. This will help him develop the judgment he needs to invest on his own.
- Get an actual stock certificate for your child’s first shares, frame it and hang it on his wall. This gives him tangible evidence of his ownership in the company and can instill pride of ownership as well as an ongoing interest in the company.
- Children may not realize that they can also lose money when trading stocks. Talk about this with your child and show him some examples of stocks that are losing money. Investment games typically drive this point home as the young investor experiments with different kinds of stock over time.