Helping Your Kids Understand Investing

It is never too early to learn wise investing.

There are three common schools of thought to use when teaching kids about investing; you can tell them,
show them, or let them. One usually flows into the other until such time as the child learns and becomes
old enough to hold their own investments.

Age Appropriate

Most financial advisors assert that when a child reaches the age of ten years they are able to begin understanding the
concept of investing in stocks and bonds as it relates to their financial plan. So, a financial plan is not
out of line for a ten year old.

Such a plan should consist of income and earnings, financial goals, savings and investments.
This can also be in the form of short-term and long-term plans. The short-term savings/investments
could include higher ticket items such as a bicycle, a game system, or other specialty item; long-term savings/investments could include a car, their first apartment, or college.

First Things First – Tell Them

Children must understand that a key element in investing is the direct correlation between risk and reward. In association with this issue is their risk tolerance, risk evaluation/assessment, and risk management. Understanding—before they invest—that they could lose everything is a lesson best taught, not experienced.

Choosing an investment to research that is kid-friendly, such as a company like McDonald’s, Toys R Us, or Nintendo, lets the child relate to already-known products and services the firm offers. The child needs to become familiar with looking the stock up on stock exchanges such as NASDAQ, following news articles, and anticipating market fluctuation.

This is a key time to start allowing them to research different stocks and investments, and come up
with their own investment decisions. When they’ve gotten to this point, then comes the test run.

Show Them – With Play Money

Before the child uses his holiday money or her birthday money to make an investment and take a chance on losing it, they should use play money. Chose two or three of their favorite stocks and invest in them. Using play money relates to the child in several different ways:

- They are accustomed to playing with the money in their daily lives.

- The act of counting, spending and using it is familiar to them.

- It is not as scary as using real money.

- It does not hurt so much when you lose it.

Giving them a reasonable amount from $50 to $250 is enough to not only get them started, but also enough to see the results in a relatively short amount of time. This is also a key time to introduce them to the concept of investment brokers and how they operate.

Once the child becomes comfortable with their investments—both the wins and the losses--then comes implementation.

Step Three – Allow Them

Minors cannot actually own stocks and bonds. However, you can indirectly have children own stocks and bonds by buying them on their behalf through a custodial investment account under the Uniform Gifts to Minors Act or Uniform Transfer to Minors Act, depending on your state’s laws.

You simply complete a form with the child’s name and social security number, along with the name of the custodian. For the incredibly brave parent, allow your child to invest in your name; be aware however, that you are responsible for anything they do. You will also need to monitor the account to ensure that your child is getting a good value for their investments and that all is well.

Because your child’s investments will be small in the beginning, there are several options to ensure their monies will be going to investments and not eaten up by high brokerage fees. Several options include the following:

- Use an online broker, which is cheaper than other brokerage services.

- Make initial purchases directly and then enroll in a company’s dividend reinvestment plan (DRIP) to buy additional shares.

- Participate in a stock purchase program through the non-profit National Association of Investors Corp (NAIC), which lets you buy a small number of shares.

- Let them buy more of the stocks you currently own.

The Bottom Line