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How To Teach Your Young Child About Investing (Even If You Don’t Understand It)

Once thought to give a “leg up” when kids enter the real world; in todays’ real world of information, complex options and decisions, understanding investing as an adult is now more of a necessity. Investing is a tool to earn money that your child can use their entire life.

Since finance is typically not taught in schools, it’s up to parents to make sure their kids learn the basics on investing. With the majority of adults not understanding the basics themselves, this can be a daunting task. Luckily you don’t have to get bitcoin or hedge funds to learn about investing. And you certainly don’t need to be an expert to teach your kids. Below are simple tips to teach investing basics to kids as early as Kindergarten, from my book Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance:

Set Expectations: We’re not trying to create the next Warren Buffet. Great if you do, and no one would complain if Junior followed in his footsteps - but that’s not the ultimate goal and puts way too much pressure on both parent and child. Investing gets very complicated very quickly, so keep it simple and stick to the basics.

Start Simple With A Savings Account: Along the same lines of walking before you fly or crawling before you walk - savings comes before investing. If they don’t already have one, open a savings account at a local bank. Encourage them to save part of everything they make through chores, PT jobs, even gift money. Show them what the interest rate is and use a calculator to illustrate how their money can make money. The higher the interest rate, the more money they make.

Explaining Investing: Investing simply means spending money in the hopes of making more money. They are already investing by depositing money into their savings account because they are earning money from it. Explain to them another way to invest is by purchasing stocks. The below is the script you can use (and feel free to replace Disney with your child’s favorite store).

“You know all those stuffed animals you have upstairs? They were all made by a company called Disney. Disney needs money to make all those toys. One way they get money is by selling stock. When someone buys their stock, it means they own a little piece of Disney Company.”

What in the World is a Stock? When your child asks this question, tell them a stock is a piece of paper (real or virtual) that represents ownership in a company. Each share of stock is worth a certain percentage of the company.

For example, if a company has 100 total shares of stock, then each share of stock represents 1% of the company. If your child owns 10 shares, then they own 10% of the company. Companies sell stock to raise money for their company, so they can buy materials, create new products, buy new factories or pay their employees. Big companies may have billions of stock. People then buy and sell stocks through a place called the stock market.

Why Do People Buy Stocks? Similar to putting money in their savings accounts, people buy stock in companies to try to make more money. They are letting the company borrow their money, and in return the company is paying them interest. If the company does well, the price of the stock increases, and the people who own stock make money. If a company doesn’t do well, the people who own the stock lose money.

Give them an example of a company they know, like Hershey’s. Let’s say they bought one stock of Hershey’s, and the stock cost $100 when they bought it.

●     Scenario 1: The week after they bought the stock, Hershey’s came out with a new chocolate bar...the most delicious chocolate bar anyone has ever tasted, even putting Willy Wonka to shame. Everyone wanted one, and the company made a ton of money selling the bars. People see the company is doing well, and buy stock, which makes the stock price go up. The stock is now worth $120, so if they sold their stock they would make $20 profit because they only paid $100 and sold it for $120!

●     Scenario 2: Now explain the flip side. This time, Hershey’s still made a new chocolate bar, but instead of tasting delicious, people said it tasted like they were eating out of a garbage can. Hershey’s lost money because no one bought their “garbage can” bars. The people who own their stock see that the company is not doing well, so they want to sell before they lose their money. The stock of Hershey’s goes down because the demand for the stock has decreased. The stock is now worth only $80. Since your child bought the stock for $100, if they sold it now they would only get $80, meaning they lose $20.

To bring investing to life, make it a competition with your child’s friends or your family. Choose 10 stocks of companies they are familiar with, like Apple, Disney, or Nike. Everyone gets $100 (pretend) and chooses one of those stocks to “invest” it in. For one month, check the stock prices each week and record how much money each person has. Get the group together weekly to compare earnings and discuss why the stocks are moving. This can be a fun family dinner activity and gives you yet another chance to explain investing. Make it a competition with a prize for whoever has the most money at the end.

Continue The Conversation: Full disclosure - Your child will not completely understand all of this, and that’s okay as most adults don’t fully grasp investing. This is just an introduction to the ideas and terms around investing. You can continue this as an ongoing conversation by working it into their daily routine. If your child loves their shoes, tell them a company called Nike makes them. This goes for Coca-Cola, LEGO, Apple, Mattel, etc. This gets them thinking about the companies behind the products they use and reasons why these companies may succeed or fail and what that could do to a stock price.

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