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Investing in stocks can be confusing, even for adults. Here are some strategies for teaching your child the basics of investing in stocks so they can get into the investing habit and learn how the market works.
One of the best things you can do for your kids is to introduce them to investing. Investing is a way of helping your child learn how to put their money to work for them.
Helping kids learn about investing can be challenging, though, since the concepts related to stocks and bonds can be confusing. On top of that, there are a lot of investing trends out there right now.
If you want to help your child learn about investing, one of the best ways to do so is to show them your own portfolio and help them learn by doing. Here are some tools for helping your child learn about stock investing.
Start with Your Portfolio
Begin by showing your child your own portfolio. If you have a retirement account or taxable account, let them see how it works. You can show your return over time and it will get them excited about putting their money to work. The more your money is working on your behalf, the less work you’re likely to do later.
Explain the different holdings, including stocks and bonds. There’s a good chance you’re using mutual funds or exchange-traded funds (ETFs) in your portfolio, so it’s a good idea to talk about that and how they work.
Talk about the importance of understanding how to choose investments that make sense for your strategy and are likely to have long-term staying power. Show how stocks represent ownership in a company, a bond is like making a loan to someone and funds are collections of investments.
Your brokerage statements, showing gains and losses, as well as dividends and reinvestment, can go a long way toward helping your child see the value of investing.
Direct them to Investment Websites
Consider sending older kids to investment websites that offer tools for beginners. Investopedia has a great glossary that can help your child learn basic terms and concepts. Additionally, the New York Stock Exchange (NYSE) has resources for middle and high school kids, including an explanation of stock tables. The federal government also has a variety of resources aimed at helping teenagers learn about financial literacy, including investing.
Also, consider using the resources at the Jump$tart Coalition (financial literacy for students) to teach your child about investing and other topics related to money.
Mock Investment Accounts
If you don’t feel your child is ready to take the plunge by investing cold, hard cash, there’s nothing wrong with opening a mock account online. These programs simulate the investing process, often with real-time stock and bond information.
Just search Google for “mock investing account” to start one of these fun programs. These accounts are a great way for a child to learn about the ins and outs of investing firsthand. It’s an especially great way to teach them how easy it is to lose money with poor investments.
Make sure that you talk to your child about the results as they go. It’s important to talk about mistakes, learn how to do better and move forward. At some point, you’ll want your child to use real money so they can begin growing their wealth.
Related: Paper Trading Apps
Fractional Investing with Online Brokers
One way to help your child see that anyone can invest with any amount of money is to open an account with an online broker. Fractional investing allows you to buy portions of a stock. This can be a fun way for your child to own Apple or Tesla stock, even if they don’t have hundreds of dollars to invest.
A custodial account at an online broker like Acorns can help them get started. With Acorns, they can learn about ETFs and consistency. They can also see how their roundups can turn pocket change into a wealth-building tool. Your kids can learn how to select investments and hopefully they will see how their money grows over time.
With a custodial account, they will have access to the money once they reach the age of majority, so it’s a good idea to instill good habits and ideas in them at a younger age so they make better choices over time.
Open a Roth IRA
If your child is earning money, you can open a Roth IRA on their behalf. This can be one way to help them get a jump on retirement investing. It’s possible to contribute up to $6,000 for 2021, or the amount of your child’s earned income, whichever is lower.
One strategy is to institute a “match” for your child. Tell them if they put 10% of their income in the Roth IRA, you’ll match it dollar-for-dollar. This can encourage them to save some of their money for the future because you’re offering to help. If your child makes $3,000 a year, they would contribute $300 and you would contribute $300, bringing the total to $600.
You can work out different strategies based on your situation, but it can be a good way to help your child get going. Plus, because many kids don’t make enough money to pay taxes, the after-tax nature of Roth IRA contributions won’t matter. Later, though, when they withdraw from the account during retirement, they will be in luck because the money grows tax-free. Show your child that the earlier they start investing, the less they need to put in to reach their retirement goals — and the earlier they could be a millionaire!
Use Investing Calculators
There are various investing calculators available that can help your child learn how compound returns work. Sit down with your child and play around with various scenarios to show them how they could reach their goals over time. Show them the results if they invest $50, $100, $200, and $500 per month over time.
You can quickly show them how investing at a young age can result in big gains later on. They don’t need to contribute as much money if they start now.
Review Historical Data
Don’t forget to review historical data, as well as talk about investing trends and volatility. Many kids are interested in cryptocurrencies right now, thanks to how much they’re being talked about. However, it’s important to look at some of the charts to see how volatile these new asset classes can be. Compare those returns to long-term gains with other asset classes.
Talk about how there’s nothing wrong with having alternatives like cryptocurrencies in their portfolio, but it’s important to be careful about only risking money you can afford to lose. Talk about asset allocation and show that they are more likely to have long-term success with stocks and stock funds. At the very least, they can reduce the stress of volatility by limiting higher-risk alternatives in their portfolio.
Related: Best Alternative Investments
Bottom Line
The earlier your child starts investing, the better off they’ll be. Talk to your child about investing, and encourage them to get in the habit of setting aside money in an investment account, even if it’s just a few bucks a week. Talk about your own investment wins and losses, and let them make a few mistakes. By making mistakes now, they can learn lessons that can help them avoid bigger problems later.
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