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From Piggy Bank to Profit: How Kids Can Learn Investing

By January 24, 2018featured, Trader Tips
From Piggy Bank to Profit: How Kids Can Learn Investing

Focusing on how kids can learn investing helps them to secure their future early–even if you don’t have ambitions of them becoming a professional stock trader.

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It’s a notion that may hit you hardest if you’re one of those people who, in their early 40s, decides suddenly that retirement looks scary and you’ve done nothing to make your savings grow.  Maybe you are depressingly discouraged when you receive a statement from the bank showing that you’ve made just a few cents this year on your savings account interest. So maybe you start dabbling in the stock market, make a few bucks in a day on a successful stock or even successful stocks, and wonder why you didn’t do this earlier.

Then it hits you: By focusing on  how kids can learn investing, they might have their nest egg before their careers even start. Maybe they’ll even be able to pay for college themselves.

Still, parents have a hard time figuring out when to start teaching their kids about money in general—let alone teaching your child how to invest. It’s an overwhelming task to teach them the value of all of the commercial pleasures in life that they enjoy. We start by giving them an allowance and hoping they’ll figure out how to budget it to last a week or a month or even save it. We are typically disappointed. They really only start to learn the value of this money, in most cases, when they get their first job and they see—firsthand—how their work is valued (by others, not parents), what it’s worth and what it can get them. Money for chores done around the house isn’t the same as money earned from someone other than a parent. It’s not valued the same. It’s not taken as seriously. That’s where investing can play an important role, because again, it’s money their making independent of their parents.

But still, money in general is a tricky topic for many parents,  and most would probably think that investing as a minor is off limits.

Surveys show that for some parents, the money question is off limits as a discussion topic with children–entirely. These children have no idea of their parents’ financial status or how they got the money they have. They are children, so they take things for granted. Parents who categorically refrain from any money discussions with children are in the minority, though. Parents who take that extra step and teach their kids about investing are also in the minority.

Some experts would argue that even a three-year-old could start learning about money and how to make it grow.

Of course, you wouldn’t start explaining money management and investment to your three-year-old—or even thirteen-year-old—by delving straight into things like price-to-book value or price-to-earnings, or how to trade equities. You’ll have to find the right approach depending on your child’s age.

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That all-time favorite, the piggy bank, is always a good start, experts seem to agree, because it teaches the very foundation of smart investing–saving.

And then what? How do you proceed from a piggy bank and how nice it is for your six-year-old daughter to have some dollars to buy the trinket she set her eyes on two weeks ago? How do you impart on your kids the wisdom of compound interest and portfolio diversification?

Start slowly and don’t underestimate them, say the experts. A lot of us underestimate our kids, thinking they’re incapable of understanding complex concepts until a certain age. True as this may be, it’s not universally true. If you yourself understand investing, then you can explain it to your kid (maybe not the three-year-old, but you get the idea).

Take compound interest on stock investment, for example. To begin with, what is a stock? What is trading stock? A stock is a small piece of a company that you can own (or trade). Simple, right? When your kid buys this little piece (or a few little pieces) of the company, the company shows its appreciation by either returning a dividend or by using the money investors have paid it to buy stocks to make the company stronger and better, which makes the little pieces more expensive. If you stick with the investment for years, you’ll get richer without doing anything–compound interest will do it for you. Be ready for an onslaught of questions, of course.

That’s for the little kids. What about the older ones?

Let your older kid be an investor. Yes, we’re suggesting that even a child can be a successful stock trader. Type “investment simulator” or “stock market game” in your search engine and just take your pick. Turn investing or stock trading into a game for the whole family. SIFMA’s Stock Market Game is a popular favorite, specially tailored for teens. It’s the next big thing after Monopoly, which you’re probably already playing. (If you’re not,  you should!)

If you and the kids are up for it, buy some real stock, or encourage them to use the contents of their piggy bank—or use part of their savings account—to buy shares in a company they like. This would most likely be a company whose products they enjoy or admire, such as Apple or Tesla–both very popular with kids. Your child could even invest in Snapchat and GoPro. The connection your kid has to a company and its products will keep his or her interest high, and it will be easier to learn to track the stock’s performance and follow the broader market. We all learn better when we’re emotionally—not just financially–invested.

So far so good, but there’s also the issue of risk, which is a fundamental part of investing and perhaps the most important aspect of the whole endeavor of teaching kids how to invest. Any investment is about risk and reward. Life is largely about the same things as well, so focusing on how kids can learn investing can teach them about risk and reward, or teaching your child how to invest, is also teaching them about life, and preparing them for the challenges they’ll face along the way.

There is always a risk and you need to make that clear. Even the coolest, greatest companies can lose value in a market downturn. Or, they might make a mistake, like Volkswagen did when it lied about the emission readings of some of its cars. No investment is risk-free, it’s as simple as that. Even so, a stock investment is a strong one because over the long term stocks tend to rise. Besides, the truth we all know is that no risk leads to no return – a great life lesson to teach your kids.

Once your young kids internalize this truth, they’ll be able to make their own investment choices armed with pretty much all they need to know. The rest is details, really, or in other words–due diligence.

 

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