Are you instilling the value of investing in your children? As they grow more financially aware, introducing them to investing equips them with essential knowledge and skills for their future.
Children develop at varying paces, so it might take time before they grasp advanced concepts like building a portfolio or asset allocation. However, teaching them the fundamentals of investing from a young age is a beneficial investment in their financial literacy.
Start by explaining the relationship between risk and reward before diving into company profiles online. Let’s explore two common investments, stocks, and bonds, to illustrate these key concepts.
Discuss Stocks and Bonds
Introducing children to finances typically begins with opening savings accounts. However, don’t stop there. Educate them about how stocks and bonds function in the market.
Stocks
Stocks are considered high-risk investments but offer potential high returns. Emphasize that stock values fluctuate, influenced by factors like growth, profitability, and market trends. While there are risks, historically, the stock market has shown consistent growth over the years, providing solid returns.
Bonds
Bonds, like U.S. savings bonds, present a lower-risk, lower-return investment option. They typically offer modest yields above the prime interest rate and are supported by stable institutions such as banks or governments.
Teach your children about various investment options, including higher-risk bonds that may yield better returns at the expense of increased risk. Highlight the possibility of default and managing expectations regarding potential income.
Keep Your Child’s Attention
Engage your child’s interest by discussing familiar companies like Nike or Apple. Tailor discussions to their interests, such as introducing them to companies related to their hobbies. Consider involving them in monitoring your own investment portfolio to spark their curiosity.
Explore investor relations pages of companies together to understand their products, earnings, and workforce. Encourage your child to choose a company they’d like to invest in; popular choices like Disney can capture their imagination.
Track Some Stocks
After introducing basic investing concepts, involve your children in selecting a company. Monitor the stock’s performance regularly together to demonstrate market dynamics. You can use online stock market simulators for a risk-free learning experience.
If your kids engage in stock picking from a young age, they will gain insights into market fluctuations, preparing them for making informed investment decisions in the future.
Let Your Child Invest
Encourage your children to start investing early, gradually expanding their knowledge about stocks and other investment options. Allow them to purchase stocks once they understand the basics, ensuring diversification and financial awareness.
If your child lacks funds to invest, you can use your resources to open a brokerage account for them or create a model portfolio of stocks they aspire to purchase.
Consider opening a custodial account for your child through an online broker, providing them with a supervised platform to actively engage in trading. Seek advice from a tax professional before proceeding.
Learn From Current Events
Recent events, like the GameStop trading frenzy, offer valuable lessons in investing. Exploring real-life examples with your children can bring the excitement and risks of investing to life, enhancing their understanding of market dynamics.
Drawing insights from market events helps children grasp the dynamic nature of investments and prepares them for future decision-making in financial matters.
Why Is Financial Literacy Important for Kids?
Financial literacy is crucial for children as it lays the foundation for their financial well-being. Educating them about money management and investing empowers them to make informed choices about their finances and secure a financially stable future.
Can I Open a Trading Account for My Child?
Opening a trading account for your child is possible through a custodial account offered by many brokerages. While your child gains trading access, you retain managerial responsibility over the account.
The Bottom Line
Encouraging your child to make investment decisions exposes them to the realities of investing, balancing potential gains with risks. The hands-on experience of managing investments, regardless of outcomes, fosters crucial financial acumen essential for their future financial endeavors.