I think many people have wondered where they would be if they only learned about investing ten or fifteen years earlier. Most people today don’t know about the concept of investing until they open their first 401(k) account, sometimes a decade or more into adulthood. That’s a shame because, with investing, time is your most valuable asset. The more time you have, the more wealth you can accumulate. That’s why I think getting kids involved with stock investing at an early age is so critical.
Teach Them the Value of Saving
Parents who encourage their kids to set aside a portion of their earnings from their summer or weekend jobs are on the right track, developing the right attitude about money and the value of savings. It’s vital because the schools no longer teach students about personal finance, so it’s an essential first step for parents to get their kids on the right path moneywise.
If you want to get your kids interested in saving, give them the doubling penny choice. Ask them which they would prefer, a penny that doubles every day for 31 days or $10,000 in cash. Most kids—heck, most people—will jump at the $10,000. But then look at their reaction when you tell them that a penny that doubles every day for 31 days would grow to more than $10 million! Getting your kids hooked on the magic of compounding money is a sure way to get them interested in saving.
Stock Investing is a Gateway to Your Kid’s Financial Security
I think it’s just as important to introduce kids to stock investing as early as possible. Imagine having the benefit of 40 years or more to have your money at work in the stock market. Of course, a fifteen- or sixteen-year-old kid is probably not going to start out with a big portfolio of stocks. But gaining a keen understanding of how the stock market works early on and the benefit of owning great companies for a long time is invaluable.
The time to introduce kids to stock investing is when they express an interest in specific products in which they would spend entire allowance if they could. Maybe it’s a pair of Nike shoes or a set of blue tooth earbuds. If they’re excited about owning something like that, talk to them about how exciting it would be to own the company that makes them. Then watch their eyes light up.
When they know how and why companies produce those goods and how they profit from it, they may be surprised to know they could share in those profits as a shareholder. Explain the concept of company stock shares, which are owned by investors, and how the value of their shares increases when the company’s earnings increase. Show them how the price of Apple has increased since the day they were born.
Getting Them Hooked on (Proper) Stock Investing
Learning about stock investing can be a lot to take in for most people, let alone a teenager. The best way to learn is by doing. One way to do that is to have them invest (with your help) in fractional shares of their favorite company. Depending on the brokerage firm, your kids can invest as little as one dollar. You will have to set up a custodian account if they are under 18. For a stock like Apple, recently selling at $170 a share, you could purchase a 1/10 share of stock for less than $20. You could encourage them to add to their fractional shares by investing a portion of the allowance and offering to match their contribution.
They will start to receive statements showing how their stock is performing and quarterly reports from the company to see how it is performing. They will also see that stock prices go up and down. That’s when they will likely become interested in how the stock market works and why it’s essential to maintain a long-term orientation when investing in stocks. Show them how through dollar-cost-averaging—systematically investing a monthly amount of money into a stock, mutual fund, or exchange-traded fund—can increase their returns over time and minimize their downside risk.
More importantly, it’s the very best opportunity to teach kids that money is a tool to help them achieve their goals and dreams, which is an entirely different mindset than trying to pick hot stocks hoping to get rich quick. Those who try to pick high-flying stocks to make a quick buck are not investing—they’re speculating, which is the same as gambling. They need to know that the stock market is not kind to gamblers.