When it comes to a financial education, it's almost never too soon to start. Teaching kids how finances is an important component to giving them a solid foundation for their future. Hands-on experience with purchasing a stock and tracking its progress is an effective way to learn about long-term investment strategies. Even if your child doesn't know the intricacies of everything you teach, the exposure will remove the mystery from the process.
1. Introduce saving to children. Whether it's change in a piggy bank, or a savings account at your bank, have your child divide up her allowance and money from relatives into spending money and saving money. A child should understand success on the stock market generally means investing for the long term. In addition, if a child doesn't save any money, she won't have any money available to invest.
2. Track your child's savings with her so she can see how money can grow. This can mean keeping a running tally of the money in her piggy bank every time she puts her allowance in. It can also mean tracking her bank savings account so she can see how contributions have increased her balance. A bank account will also pay interest, and your child will begin to see how it's possible to get back even more than the total of her deposits.
3. Have your child research her favorite company, and help her choose if she's uncertain. A young child might enjoy researching Disney, or the business that makes her favorite food. After she knows a little bit about the company, including its recent profitability, purchase a few shares on her behalf. Track the stock with her so she can see how its price, and her investment, goes up and down. Emphasize that stock is usually held for a long time, and that investing in a company she likes won't always net her a profit.
4. Invest money in a kid-friendly mutual fund. Introduce her to the idea of diversification, or spreading your money around over different kinds of investments that have different risk levels and different returns. Some brokerage firms offer funds geared toward children, and which require a low initial investment. Certain funds will also be socially responsible as they will refrain from investing in companies that sell alcohol or tobacco, for example, if they are geared toward children.
5. Keep up the conversation with your child. Talk about recent business stories in the news and how it relates to the stock market. If a company reports a decline in quarterly earnings and its stock price dipped as a result, show your child the numbers and explain the relationship between company performance and stock price. Even if she shows minimal interest, this exposure will help build a financial understanding that will assist her in her adult years.
- All investing comes with risks. Whether it's your money or your child's, discuss the risks of any investment vehicle with a financial adviser before handing over the money to your children.
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