How to Explain the Concept of Investing to Your Child

Jul 30, 2022 By Triston Martin

Do you share your knowledge of investing with your children? It's a good idea to teach kids about investing as soon as they start learning about money and other financial ideas. This way, they'll have the knowledge and skills they need when they become financially independent adults. Even though children age at various rates, they may not be ready to understand concepts like portfolio construction and asset allocation for some time. The fundamentals of investing may, however, be taught to a child as early as five years of age. You can explain the link between risk and reward to your children well before they start looking up business profiles on the internet. Let's take a look at two basic investments, stocks and bonds, to better understand these ideas.

Start With the Basics

Begin by just bringing up the subject of money whenever the occasion arises in your day-to-day interactions. To save money when shopping, you and your kids may talk about how to seek sales or compare prices. You may have them see you paying bills so they can understand how much energy, heat, and a mobile phone cost. Show them how you're paying off debt and any lessons you've learnt, such as how harmful it is to pile up credit card debt. Give them an allowance or encourage them to earn money by babysitting or even mowing lawns. Divide their money into thirds and have them spend one, save one, and give one.

Discuss Stocks and Bonds

Introduce the concept of stocks as a variable-risk, variable-return investment in contrast to your child's existing savings account. Stocks are considered high-risk investments in the financial world, but they also have the potential for large rewards. Demonstrate how a company's growth and profitability affect the value of a stock. Be sure to mention that stock risk can't always be accurately forecasted due to tampering in business records or CEOs lying; for example, this is an exception, not the rule. Historically, the stock market has climbed steadily over the last century, resulting in respectable returns.

A low-risk, low-return investment, bonds are a good choice. Bonds often offer a little premium over the prime rate and are backed by well-established organizations (usually banks or governments). You may be able to receive greater returns by investing in lower-rated bonds, but you may not be able to depend on receiving your dividends on time. The gift of savings bonds might be an excellent starting point for teaching your youngster about how this kind of debt protection works.

Keep Your Child's Attention

Show your youngster what stocks you hold. Boeing, Nike, and Apple are just a few of the brands that might pique their interest. Each company's investor relations website should be viewed in conjunction to understand more about the company's products and revenue. Then, ask your youngster which business they'd want to invest in with their money. Even at a young age, children are familiar with company names and have personal favourites. Children are likely to like Facebook as well as Disney, for example.

Sit down with your kids and let them choose a firm once you've taught them the basics. Make a little investment in the stock if you can afford to do so, and then check on it at least once each week to see how much it has changed. Make an online model portfolio and follow stocks for fun without having to pay for shares.

Let Your Child Invest

You may go into further detail about stocks and other assets with your kid as they become older. Allowing a youngster to purchase their own stocks is a good idea down the road. By the time they are ready to invest, they may have put up enough money in a savings account. Invest a third in bonds, stocks, and savings. Your youngster will be able to make direct comparisons between various investment kinds.

You have two choices if your kid lacks the financial resources to take part in the educational process. For your kid's benefit, you may either start a tiny brokerage account with your own money or create a model portfolio of equities your child hopes to purchase in the future. If there are no finances at risk, you'll need to come up with creative solutions to keep their attention.

Conclusion

Allowing your kid to make and take real-world choices and risks is critical. Even though they may lose money, the aim of this activity is to teach kids about investing, and that includes understanding that investments have both positive and negative aspects. No matter how things turn out, the knowledge they receive from tracking their assets and seeing gains and losses (real or hypothetical) will be priceless.

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