Investment accounts for kids are growing in popularity. And it makes perfect sense because time is one of the most valuable commodities when it comes to investing. The longer you're in the market, the higher your chances of earning strong returns, and kids have more time than anybody to watch their investments grow.
During the pandemic, while the U.S. economy experienced a significant shock, the youth economy remained buoyant throughout 2020, and the amounts that kids earned, saved and gave to charity increased. As young people have become increasingly savvy financially, more are prepared to begin investing and taking advantage of the market's potential gains. But first, they need to learn about the stock market.
Teaching kids about the stock market while they're young can be a powerful way to prepare them for a strong financial future. Of course, before starting any investment, it helps to establish sound financial habits.
Here are three steps to help your kids understand the stock market.
1. Keep it simple
At the most basic level, the stock market offers opportunities for individuals to purchase and own small parts of companies. Think about public companies that your kids like and know, such as Disney, Nike, and McDonald's. Explain that each of these companies has many owners and that by purchasing a small part of the company, you and your child could own a tiny part of Disney or The Home Depot or whatever company your child may like best.
Eventually, kids may be ready to learn about mutual funds, exchange-traded funds (ETF), and other types of investments. But it's best to start by explaining individual stocks, as that is easiest to understand.
2. Answer common stock market questions
Your child may have heard some things about the stock market at school or on social media, and they may have some specific questions. For example, many kids are curious about risk, how much they are required to invest, and how stockholders make money. Be open to discussing their questions and answering as best you can, but rely on outside resources if needed.
Here is a list of children's books from Investopedia that can help you introduce the concept to them. Don't feel like you have to understand everything about how to explain stocks to a child. There are plenty of online resources that can help you. For instance, use the NASDAQ glossary to look up important stock market terms and their meanings.
3. Use a stock market simulator
While children need to learn that investing in the stock market over time can lead to long-term gains, it's also important to know that there is risk involved. One of the best ways to see what it's really like is to use a stock market simulator. Consider joining with your child to use a popular simulator like the Investopedia Stock Simulator, Wall Street Survivor, and HowTheMarketWorks.
4. Open an investment account for kids
Investing is one activity that you can learn more about by actually doing it. After your child has a basic understanding of how the market works, they may be ready for their own kid's investment account. As you regulate the account and the investments, you can help guide your child in making smart decisions and managing risk. In doing this, your child will get a genuine experience of what it means to invest in the stock market.