When it comes to teaching your kids about the stock market, it can pay to start early.
Financial literacy at a young age may correlate with higher net worth in your 20s and beyond, according to a study by the research organization Brookings Institute.
Understanding the stock market is a key element of financial literacy. Yet, it can be intimidating. The key may be to break down complex topics into simpler ideas that your children can understand. Slowly introduce the concepts as your child grows up. You will be giving them a powerful tool for building long-term wealth and setting them up for adulthood.
How to introduce the idea of saving
You can start exposing your child to foundational concepts by introducing them to the principle of saving. Make the process hands-on and visual by having your child save in jars so they can watch their savings accumulate over time.
Teach your kids to save with purpose by dividing their savings into four jars labeled wants, needs, causes and goals. Ask them to name which of these categories are most important to them and have them save extra in the jars that matter most.
You might also take your child with you when it’s time to make a purchase. Demonstrate how money is exchanged for goods and services, and show them how to compare the cost of one thing to another. Explain that a little bit of money can turn into a lot of money over time when they save.
How to explain stock basics
When your children are old enough, you may be able to introduce the idea of owning stocks. They’re probably already familiar with publicly traded companies that make the products they may already use, such as Mattel, Kellogg’s, Nintendo, Disney or Apple.
You can teach your kids that when people buy stock, they actually buy a small portion of companies like these, and when they perform well, the stock becomes more valuable. When companies do poorly, stock value declines. And when you sell a stock whose value has increased, you make a profit. And when a company underperforms, the stock’s value can fall. Selling the stock at that point would mean they lose money.
There are a number of games available that can help kids learn how the stock market works. The Securities Industry and Financial Markets Association (SIFMA) offers The Stock Market Game free to elementary school aged kids. The game gives them the chance to manage an imaginary $100,000 portfolio online.
As your child begins to learn more complicated math, they may be ready to wrap their heads around more abstract ideas related to investing. For example, if they’ve started learning about fractions, you can explain the concept of compounding—the return earned on your principle, plus your past returns. Demonstrate this concept by having them multiply $10 by 1.25. Then have them multiply the product by 1.25 again and again, watching the number grow by greater and greater leaps each time. Tie this into the way that investments can grow inside an investment account, and explain how the earlier you start investing, the longer you are able to take advantage of this benefit.
Explaining why people—and kids—may choose to invest
As you’re teaching your kids how the stock market works, try talking to them about why people invest in the first place. Explain that investing can be a powerful way to create wealth over the long term that helps people save for goals, such as going to college, buying a house or retiring from work.
Over the long term, average stock market returns can be much higher than the interest your money earns in a savings account, so it can be a way for people to build wealth fast enough to achieve these big goals.
Explain that another reason people invest is to overcome inflation. Over time, the prices of goods and services tend to go up, and the value of money tends to decrease. Use a practical example: Almost 90 years ago, a nickel could get you a 12-ounce bottle of Pepsi. Ask your kids to think of something they could buy for a nickel today. If your child simply kept their money in a jar at home, over time it would be worth less and less. However, if they invest that money, the potential gains they could make could help their savings increase in value over time, instead of decrease.
Opening a custodial account for your kids
To give your child a more in-depth experience of buying and selling stocks, consider opening a custodial brokerage account for them.1 With a custodial account, you can make monetary gifts and retain control of investments and withdrawals until your child reaches adulthood at age 18 or 21, depending on the state in which you live. When you subscribe to Stash+ ($9/month), you can open two custodial accounts with a minimum deposit of only $1.00.2
Unlike other savings accounts for children, such as 529 plans for college education, custodial accounts offer flexibility in how they are used once your child is an adult. They could use the money to fund education, but also to buy a new car, travel the world, or open a business.
You can use the custodial account as an educational opportunity to help your child learn to make investment decisions. Help them identify individual stocks of companies they’re interested in—owning a piece of the company behind their favorite toys or movies may help fuel an enthusiasm for investing. Consider picking out some index funds or low-cost ETFs on their behalf, explaining the benefits of diversification. Think about balancing helping them follow their own interests and developing a healthy long-term investment strategy that has the potential to gain value.
Developing an understanding of the stock market can demystify investing and can put a powerful wealth-building tool in your children’s hands. Introducing age-appropriate concepts to your children prepares them to be responsible investors and gives them a leg up on their peers. Best of all, it can be easy to make the learning process fun and engaging when you help them invest in the stocks of companies they love.