How to Teach Your Child About Investing

Are you teaching your children about investing? As they become aware of money and other financial concepts, it's important to familiarize them with investing and arm them with the know-how and tools to take with them into adult life.

Children mature at different rates, of course, so it may be a while before they’re ready to tackle concepts such as portfolio creation and asset allocation. But you can teach them the basics of investing when they are quite young.

Explain the relationship between risk and reward well before they start reviewing company profiles online. Let’s sketch a brief picture of two common investments to illustrate these concepts: stocks and bonds.

Discuss Stocks and Bonds

One of the first ways we introduce our kids to finances is by opening a savings account for them. But don't just stop there. Introduce them to how stocks and bonds work.

Stocks

Stocks are classified as high-risk investments. But along with that comes the potential for high returns. Explain that a stock’s value can go up and down and that you can't always predict the effects of the associated risks.

For instance, growth and profitability can boost a stock's value while negative news can send it down. Still, these events are outlier; the stock market has risen consistently in the last hundred years, offering solid returns.

Bonds

If someone has given your child a financial gift like a U.S. savings bond, it can be a great jumping-off point to explain how this sort of debt security works. Remember, a bond is a low-risk, low-return investment. Bonds generally pay a small amount over the prime interest rate and are backed by stable institutions, usually banks or governments.

You can introduce your kids to these investments by telling them about purchasing lower-rated bonds that may offer better returns in exchange for higher risk. Make sure you advise them of the potential for the institution to default and that they can't necessarily count on getting the income they may expect.

Keep Your Child’s Attention

One of the best ways to get your child(ren) interested is by getting their attention with things they (and you) may already know. Get them into the spirit by teaching them about popular companies like Nike or Apple. Or, speak to their interests. If they're interested in planes, for example, introduce them to a company like Boeing. If you own stocks, consider showing them the companies that make up your portfolio.

Take the time to explore the investor relations pages of different companies together to learn more about what the company makes, how much it earned that year, and how many people work there. Then ask your child what company stock they would like to buy. Young as they are, kids often know corporate names and have favorite firms. Disney is one that may be popular with some children. 

Track Some Stocks

Once you introduce your kids to basic concepts, sit down and let them select a company. If you have the money, buy a few shares in the stock and then check the investment together at least once a week to show how it can rise or fall. If you don't want to take that risk, consider making a simulated online portfolio and tracking stocks for fun, without the expense of purchasing shares. You can start out with Investopedia's Stock Market Simulator, which is free to use.

Let Your Child Invest

Give your kids the basics of investing when they are younger. As their knowledge expands, you can provide them with a more in-depth explanation of stocks and other investments. Let your child buy their own stocks at some point, especially if they have some cash in a savings account. Part of teaching them is ensuring they don't put all their eggs in one basket, so suggest investing a third in each and keeping a third in savings. This also helps them compare the returns of different investments.

But what if your child doesn't have any money to participate? There are a couple of options:

• You can use your own cash to open a small brokerage account where your child can make investments
• You can build a model portfolio of stocks that your child wants to buy someday

There are several ways to open a brokerage account for a minor.

Another thing to decide is whether you want to introduce your child through an online broker—there are some that are especially good for beginners. Depending on the brokerage, you may be able to open a custodial account in the name of your minor child and give them the right to trade in it online. As the adult, you would remain the official custodian. As with anything else, check with a tax expert for the best option before you start.

Learn From Current Events

The heavy trading in GameStop during the winter of 2020 taught many kids about investing, according to The Washington Post. In January 2021, the video game retailer's stock became heavily shorted, leading to heavy price increases and volatility and, ultimately, major losses for many investors. At one point, the company lost 70% of its value in two days.

According to the outlet, many youngsters heard about the news on YouTube and from friends. Parents were using it as a teaching moment. In fact, one 10-year-old who received $60 worth of GameStop stock for Kwanzaa saw it grow to $3,200 before selling it in time. Walking through what happened and why is a good way to make the excitement and risks of investing come alive for young investors.

The Bottom Line

It’s important to allow your child to make real decisions and take real risks. Your child may lose money, but the purpose of the exercise is to familiarize them with investing, and part of that is learning that investments have advantages and disadvantages. Whatever the outcome, the experience of following their investments and gaining and losing money—whether actual or theoretical—will be invaluable.