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How to teach your child about investing

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By Andrew Beattie

 

 


Have you taught your children about investing? As your child becomes more aware of money and other financial concepts, it is vital that you arm them with some important investment knowledge. Read on to find out how to impart some investing smarts to your children. If you don't have the basic knowledge required for investing, and need to learn more yourself, read Investing 101: A Tutorial For Beginner Investors before we start.


Investing Should Be a Family Activity

Some parents are guilty of not discussing personal finance with their children, and almost all parents are guilty of not discussing investing with their children. Investing should be a family activity. Children mature at different rates, so it may take some time before your child is ready to tackle concepts like portfolio creation and asset allocation; however, the basics of investing can be taught quite young.


Risk and Reward

Before you have your kids spending Saturdays at the library using the Internet to check company profiles, you will have to explain risk and reward. Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that your investment experiences over time - the return on investment (ROI).
Below we will sketch a brief picture of the two more common investments: debt securities and stocks.


Easy Ideas to Tell Your Kids About: Stocks

Stocks are variable risk, variable return investments. On the whole, they are categorized as high risk and high return. You have to make it clear that all the risks involved in the stock markets can't be predicted.

Enron and other companies have proved that accounting sheets can be tampered with and CEOs can lie. But even with the unknown risks, the stock market is a strong investment because, over time, it has seen a general rise.

SEE: Stocks Basics


Easy Ideas to Tell Your Kids About: Debt Securities

A bond is a low-risk, low-return investment. Typically, bonds pay only a small amount over the prime interest rate because they are backed by stable institutions (usually banks or governments). You can buy bonds from unstable regions of the world that offer better returns, but these countries often have unstable governments, so you can't necessarily count on getting that return down the road.

Therefore, it may be best start your child with stocks and explain that bonds become more important as you age and need guaranteed investments. Your child will probably not have enough money to make bonds worthwhile, and may actually lose money to inflation.


Getting Your Child's Attention

When you are checking your stocks, show your child the companies of which you own a small part. If you own any exciting companies that might be of interest to your children - plane manufacturers like Boeing, sports equipment specialists like Bauer, technology and video game companies like Sony - make sure that you request the company's current investor relations package, or print it off the Internet, so that you can show your child more about those companies, including how much they earned, what they make and how many people work for them.

Then you can ask your child what company he or she would like to buy. Children have favorites even if they are not aware of them. For example, Nike, Nintendo, Sony and Disney are popular with most children. Once again, you can go on the Internet or write a letter to these companies to get a copy of the investor's package. This will give your child something interesting to flip through, even though he or she may not understand all the papers inside. Disney, for example, has an investor relations newsletter that features a rotating cast of characters parading through their announcements.


Buying and Tracking

Once you have introduced your child to some basic concepts, you can sit down together allow him or her to select a company. If you have the money, you can buy the stock and track it with your child. You should give the statements to him or her to keep in a financial binder (you can add his or her banking information here also and separate the two different sections with a divider). If you don't have the money, make an artificial portfolio and track the stock for fun. You can even do it on this site: try out Investopedia's Stock Simulator.

You and your child can follow your stocks with daily, weekly and monthly summaries on Yahoo! Finance.

When your child is older, you can provide a more in-depth explanation of stocks and other investments. Eventually, you want to let your children buy their own stocks. Your child may have enough cash diligently saved up in a savings account by the time he or she is interested in investing. Don't put it all into a bond or the stock market, but invest a third in each and keep a third in savings. This will allow your child to compare the performance of a savings bond, stocks of his or her choosing and the interest from a bank account.

If your child doesn't have any money, you have two options. You can use $100 of your own money to open a discount brokerage account for your child to make investments through, or you can continue to use an artificial portfolio of stocks that your child wants to buy some day. In the latter case, you will need to find ways to maintain your child's motivation.


Conclusion

If you are able to pick stocks together and track them when your children are young, they will get a sense of the up-and-down cycles that stocks go through. This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic.

During all this, you want to allow your child to make real decisions and take real risks. Yes, your child may lose money, but the purpose of this exercise is to familiarize your child with investing. Part of this exercise is learning that any investment has advantages and disadvantages. Your child may not make a fortune, but the experience of gaining and losing money is almost as valuable.

Originally posted on Investopedia.com

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