How to Introduce Your Kids to Stocks

One of the greatest gifts you can give your children is to empower them to be financially secure.

Most parents think this is about giving their kids a good education. After all, once they get a good job, they will be set on a solid career path.

But in this fast-changing world, that is not enough. By that I mean having a job will not make your child financially secure.

This is always the case in any capitalistic economy but the events of 2020 have proven this harsh fact beyond any doubt.

When your child grows up he/she should to be able to create wealth in good times and bad.

Investing is the ideal means to this end.

An Important Investment in Your Child's Future

Children need to be taught not only the basics of managing money but also how to invest it for their future. That way, they will be on the right path to financial security in their lives.

In other words, if they are working hard for money, they must make their money work harder for them. That's why they should be taught investing at a young age.

The earlier your child starts investing, the better off they'll be. According to a study by the Brookings Institute, financial literacy at a young age may correlate with higher net worth in the 20s and beyond.

One of the best things you can do for your kids is to introduce them to investing. It's smart to familiarise them with investing when they're young. Your child will learn, at an early age, how to put their money to work for them.

When they grow up, they will thank you for empowering them with this knowledge.

Investing is not Rocket Science

Children mature at different rates. So it may be a while before they're ready to understand things like asset allocation and creating a portfolio.

But you will be surprised at how fast they can learn the basics.

The world's greatest investor, Warren Buffett, was only 11 years old when he bought his first stock. He jokes that he was wasting his life up to that point!

This Bloomberg article talks about kids as young as 7 years being introduced to trading platforms. The kids understand how they work and are using them just fine.

So don't worry about the topic being too difficult. Start small and gradually introduce more advanced concepts.

How to Get Started

A good way to get started is to introduce the idea of saving. Explain to your child that a small amount of money saved regularly, can turn into a lot of money over time.

You can do this with a simple idea of 3 glass jars. One for saving, one for spending, and one for investing. Put a fixed amount of money in each one every week.

Insist that they can spend from only the money in the 'spending jar'.

The 'saving jar' is only to be used for saving money i.e. they can only put money in but not take it out.

You child will find the 'investing jar' intriguing. Saving and spending is easy to understand. But they will wonder how they can start investing. This is the right time to talk to your child about it.

You can start by showing them your own investments. Show them your portfolio. Explain why you chose to invest in those companies. Show them how much dividends you received.

Explain that your money is working for you. Tell them this kind of income does not involve physical labour.

Your children will certainly be interested but may not be thrilled by the idea of waiting years for a reward.

After all, children and adults alike would prefer to have money to spend now rather than later. However, kids who learn about investing early will grow up knowing how to manage their money.

And that's a priceless skill.

In fact, once they get the hang of it, they may even be eager to invest all by themselves!

Talking About Stocks

Start with the basics like what a stock is.

Tell them stocks represent ownership in a company and the stock market is a place where people exchange ownership via trading i.e. buying and selling.

Your children will want to know why people buy and sell shares. You can explain this using examples of companies they understand.

If they like eating Dominos Pizza, then by using Jubilant Foodworks as an example, you can introduce a whole lot of ideas about investing quickly and easily.

For example, talk about the profits and losses that Jubilant Foodworks makes by selling pizza and how that affects the stock price.

Also explain why investors may want to either buy or sell the stock based on the latest news about the company.

Look at the investor relations page of the company together. This way you can show them how much money the company made in a year, how many people work there, how many stores it has, etc.

Track the stock in the news. Show them simple charts of the stock price. Explain how the price moves based on things like the general market movement, company specific news, etc.

Using examples in this way about familiar brands, is a great way to keep your child's attention in these conversations. It's also a great way to start conversations about investing around the dinner table.

Keep the process fun. Your kids shouldn't feel like the stock market is a school subject!

A slow and Steady Process

Take your time. Your child will learn gradually. The stock market cannot be understood quickly. Even Warren Buffett says he learns something new every day.

Slowly familiarise your child with how markets work. This will demystify the process of investing. They will feel it's something they can do without too many problems.

This slow and steady learning process will also make investing feel more accessible to them when they're older.

Once your kids understand the basics, don't be surprised when they start asking you advanced questions on investing!

That's when you should take things a step further.

Ask them to join you in keeping an eye on the stocks in your portfolio. Things like the closing stock price of the day and news about the company. This will accelerate the pace at which your child acquires investing knowledge.

Get Practical

At some point, you will feel your child is comfortable with the idea of investing in stocks. This is the time for practical application of knowledge.

Let them pick out a stock of a company that they know or like.

Don't hesitate to do this at this point even if you think your child is 'too young'. Remember, children learn at a much faster pace than adults.

Besides, you have already introduced them to the theoretical stuff. This is the next logical step.

Start with a small investment. One stock. If you child picks a stock you think is a bad, tell them why you think so. Ask them to pick another.

Don't think about building a portfolio at this point. That comes later. When your children are older, you can encourage them to invest in more stocks and slowly build a portfolio.

Get started by investing a small amount of money in their favourite stock.

Don't worry about profit or loss in the short term. It's important to allow your child to make real decisions and take real risks.

This is also a good time to talk about investing trends and day to day volatility.

Make sure to track the performance of the stock together regularly. This process will give a huge boost to your child's knowledge about the stock market. There is nothing like practical learning.

Direct them to Investment Websites

When your children are in a position to read and understand more about stocks, you should direct them to appropriate websites. You can do this either before or after investing in your child's first stock.

Read articles together. There will surely be some words your child won't understand. Explain it to them in simple language.

Inform your child about the financial industry's tendency to use complicated language and tell them not to worry about it. A simple google search can answer most of their queries quickly.

If your child is a teen, consider Profit Hunter, Equitymaster's free newsletter.

Breakout Wealth is a good choice to get the day's most important wealth building stories in one place.

Consider Mock Investment Accounts

This is a handy tool if you are not comfortable with the idea of your child investing real money in the market.

A google search on 'mock investment accounts' will provide you with a number of sites which will enable 'simulated investing'.

These accounts can provide an alternative to investing real money.

Advanced Information

When your child is older, in his/her teens, you can introduce concepts like asset allocation and the difference between stocks, bonds, commodities, currencies, cryptos, etc.

Do keep in mind, your child won't be interested in all assets equally. He or she may even want to jump from learning about one asset to another. That's perfectly normal.

You can also introduce them to various formulae and mathematical ratios to find the best stocks. Also, you can teach them to use investing calculators and excel sheets.

Last but not least, explain the power of compounding and how it's the secret to creating huge wealth.

You might want to keep this topic for a little later. Compound interest is a concept that is tricky to grasp.

For example, it's easy to explain how a 10% increase in Rs 100 results in Rs 110.

But it's not as easy to explain how 10% compounded twice results in Rs 121 and not Rs 120.

However, it won't be long after your kids start watching the markets regularly, that they become curious about long-term wealth creation.

After all, they will see wealthy investors on the news and would want to know how they become so rich. That would be a good time to talk about compounding.

In Conclusion...

Armed with the knowledge of investing from a young age, your children will know how to put their money to work for them.

This skill will hold them in good stead and will open the doors to a wealthy life.

It's a great gift and your children will be grateful for it.