Investing in stocks can be a great way for people to make the most of their money, but the stock market can seem complicated to adults, so it can be particularly daunting to explain to kids.
However, it’s surprisingly easy to grasp the basics, and there are investing games for kids such as Money Missions which can make it easier to understand.
It’s also important that children understand the difference between saving money and investing in stocks and shares. While gains from investing can be bigger than saving, the value of stocks can go up or down in line with the company's value.
In this guide, we'll go through how the stock market works, as well as how to talk to your children about investing.
Why explain the stock market to your kids?
Learning about the stock market is an important part of financial education. By explaining the stock market to kids, you can help them understand the whole process of investing, which will make it all much more accessible for them when they are older. Having a good understanding of money is essential to give your children a bright financial future. Helping your children learn about financial matters early can have a big impact on their lives.
Explain the basics of the stock market
While the stock market can be confusing, the basics are easy enough to explain to older children. If your children are still quite young, you should focus on a very simplified explanation. Things to cover:
What is investing? Investing can be used for saving up, much like savings accounts or piggy banks. In a regular savings account the money is held by a bank. Investing in the stock market means putting money into a company or business.
What are shares? You invest by buying “shares.” A share is a small part of the company that you can buy. We use the term “stocks” when talking about multiple shares in multiple companies. In other words, “stocks” refers to the stock market in total. A lot of the time, people use the terms “stocks” and “shares” interchangeably.
What can you invest in? There are a lot more options when investing in the stock market, compared to savings accounts. You can select which companies or combinations of companies to invest in. You can either pick specific companies to invest in, or you can invest in a fund that follows the strength of the stock market. This means you can tailor your investments to suit you best.
There are several types of investments to pick from, in addition to stocks or savings accounts. You can also invest in currencies, commodities, ETFs (exchange-traded funds), and derivatives. You can trade all of these on the stock market.
How does the price of stocks change? For older children, you can also explain how the value of stocks is relative to the value of the company you invest in. This means that if a company makes a lot of profit, the company value will increase and the share value will increase too. This is how money is made on stocks.
Explain how the price of shares can go up or down
The best way to explain this is to cover the points below:
What is interest? Use small round numbers. You could say that if your child saves $100 in a savings account and gets 1% interest, they would gain an additional $1 per year from the bank.
How are shares different? Shares can have higher interest compared to savings accounts, but shares can also lose their value.
When do share prices go up? Share prices go up if the company does well. When share prices for companies across the market continue to rise, it is called a bull market.
When do share prices go down? Prices will go down if the company loses money and does badly. When share prices for companies across the market continue to fall, it is called a bear market.
Why are there higher interest rates? If you invest in a company that is very successful, the value of the shares could increase by a much higher percentage. You can explain this using the same example as before. Explain to your child that if they save $100 in stocks, they might get an interest rate of 5%. That would mean that they get $5 interest rather than the $1 their savings account would give them.
What happens when shares lose value? You can’t lose money in a savings account. On the other hand, shares can lose value if the company you've invested in becomes less profitable. Using the same math as above, if your child invests $100 and the company loses value by 5%, they will end up losing $5 from the money they invest - leaving them with $95 in total.
Famous stock exchanges and indexes around the world
Stock exchanges, also known as the stock market, are places where you can buy and sell securities. There are many stock exchanges across different countries and regions around the world. Some of the biggest and most influential stock exchanges include the New York Stock Exchange and the NASDAQ here in the United States, the London Stock Exchange in England, the Tokyo Stock Exchange in Japan, and others in Hong Kong, Amsterdam, and Shanghai.
Indexes are another famous way to understand the overall market, and an index can give you insight into how a specific market or overall economy is doing. Well-known stock indexes like the Dow Jones, S&P 500, and Russell 2000 help investors understand the market and make informed investing decisions. Indexes can help you teach kids about trends in the stock market.
Explain the benefits of investing in stocks
There are a lot of stock market benefits that you can explain easily to your children. These include:
Bigger potential returns: The main benefit of the stock market is the potential for higher returns or gains compared to other types of savings. Of course, as mentioned above, this is not at all a guarantee.
Ethical investing: When you put money into a savings account, you don’t get a choice in what the bank does with your money. However, when you invest in the stock market there are lots of opportunities for ethical investing. This is where you invest in companies that only work in certain areas, or companies that have good practices that are good for the environment, the countries where they work, or good policies to help their employees. Investing in an ethical company or an ethical investment fund means that your child's money is put to good use and helps further a cause they believe in.
Expert advice: There are lots of ways to choose what to invest in, but it can be overwhelming. Luckily, there are plenty of ways for your children to seek out expert advice about what to invest in.
Explain the risks of the stock market
As well as talking about the benefits and good possibilities of the stock market, it's important to talk about the risks of the stock market. As we've already mentioned, it's possible for share values to decrease. This means that it is possible to lose money on stocks. There are also more complicated ways of investing in the stock market that can lead to bigger losses. In some cases, you can lose more money than you invest.
Stock market crashes
The stock market has its risks, and there have been several crashes throughout history. The famous crash of 1929 happened over several days when countless investors sold so many shares that the whole market lost value and collapsed. This collapse led to the Great Depression. Other crashes, like Black Monday in 1987, led to heavy losses of the overall stock market’s value. Remember, however, every market crash has eventually recovered and led to increased market value over time.
Fun stock market exercises for your kids
Playing games is a fun and interactive way for your kids to learn about the stock market. The hands-on approach makes it easier for kids to get involved in new money topics. Some great exercises and fun options to teach about the stock market for kids include:
Engage in fantasy or pretend stock investments
Step into the world of fantasy money where kids can pretend to be the investor in charge. Help them choose a stock to invest in, like Disney or Gamestop, or create their own pretend portfolio. Speculate what happens when different businesses do well or poorly. See how well your investment could do over time.
Come up with your own prospectus
A prospectus tells potential buyers why its company is a good investment. Creating your own prospectus can be a great activity that teaches kids how to think critically about money and business. Have them brainstorm their own company and think of ways to convince people it's a good idea to buy shares in their company.
Create your own unique stock-trading algorithm
Pro investors use math to figure out the best ways to put their money to work. Although they’re usually pretty complicated, you can make your own simple stock-trading algorithm easier than you think. Can you think of good rules for investing? For example, if it’s raining, buy shares of umbrella companies.
Design your own stock broker’s jacket
Similar to varsity jackets or sports team uniforms, stock brokers used to have their own distinctive jackets. These special clothing items set them apart from the rest, giving them their unique look. Create your own trading jacket and get in the investing zone every time you put it on. Include favorite colors, prints, characters, patterns, and designs. Put your company or name on the back to make it your own.
Make use of the Intro to Investing Mission in GoHenry’s in-app Money Missions
If you're looking for more ways to help your child learn about the stock market, our in-app Money Missions are here to help. These fun bite-sized lessons and quizzes are targeted to your child's age to help them get a good financial education. As well as lessons about investing, we also have lessons about budgeting and planning, saving, and spending wisely. In a fun and easy-to-understand lesson, Money Missions help make sure that your child makes the most of their money.