Teaching children about the stock market can be confusing, but learning how the market works and the benefits of investing is important. There are methods you can use to ensure your child understands stocks and bonds, investment trends and the basics of the stock market. Seven of the best tools for this purpose are defined below.
1) The Portfolio
Show your child your portfolio and explain why it is important and how it works. When you explain how a portfolio generates returns, you can help ensure your child becomes excited by the possibilities. Explain the different types of holdings such as stocks, bonds, mutual funds and EFTs and how they work. Explain how you choose your investments and your strategy as simply as possible.
You can tell your child stocks are a type of ownership in a company and purchasing a bond is similar to a loan. According to Money Prodigy, understanding the stock market is easier if you use your brokerage statements to explain reinvestments, dividends, losses and gains.
2) Opening a Roth IRA
If your child is old enough to earn money, opening a Roth IRA for them is a good idea. You will be providing your child with an early start on investing for their retirement. For 2021, you can contribute $6,000 of what your child is earning or their total income, whichever figure is lower. You can also agree to match their contributions in full or by a certain percentage.
This helps provide the encouragement necessary for them to save for their future. Work out a strategy with your child and tell them they will not need to pay taxes until they retire. Explain the earlier an investment is made, the faster retirement goals can be reached. Teach your child about finance forums and use Wall Street Forum as an example.
3) Historical Data
Do not overlook the importance of historical data, stock market volatility and investment trends. A lot of children talk about cryptocurrency with keen interest. Show them charts to demonstrate the volatility of new asset classes and compare the returns with other assets. Explain alternative assets are fine in a portfolio, but investments should only be made when they can afford to lose.
If your child understands asset allocation, their success with the stock market over time improves. If nothing else, stress resulting from volatile stocks can be decreased by placing fewer high risk alternatives in their portfolio.
4) Investment Websites
According to Financial Times, one of the best options for older children are investment websites with tools designed for novices. The glossary of basic investment concepts and terms on Investopedia is excellent. You can also find resources through the NYSE or New York Stock Exchange for children in middle or high school. Different resources are available through the federal government to teach financial literacy to teenagers as well.
5) Investment Calculators
According to Acorns, you can use investment calculations to teach children about compound returns. Take the time to experiment with different scenarios to show how their goals can be reached as time passes. Show the results for investing anywhere from $50 to $500 each month. Your child will learn investing while still young can lead to excellent gains in the future. Less money is required per month when starting sooner.
6) Fractional Investing
Opening an account through an online broker is a good way to demonstrate the power of investing. Fractional investing makes it possible to purchase a portion of a stock. Even if your child does not have a lot of money to invest, they can still own a portion of a popular stock. Most online brokers offer custodial accounts to help your child begin. You can teach them about EFTs, stocks, bonds and the best options to build wealth.
Your child will learn to understand how investments are chosen and watch their money grow as time passes. A custodial account is a good option because your child will be able to access the funds once they reach a specific age. Teaching your child at a young age is a great idea since it will result in better choices once they become an adult.
7) Mock Investment Accounts
If your child is very young, it may be soon to start making investments with actual money. In this instance, a mock investment account is a good option. According to Mama in the Now, you can choose from several different options online. By simulating the process of investing, your child can learn about stocks and bonds in real-time. All you need to do is conduct an online search for mock investment accounts to review the options available. You can teach your child about the stock market easier if they have something to look at.
You can also show your child how easily their money can be lost if they make poor investments. Explaining everything as you proceed is important including what to do to move forward after making a mistake. Eventually, your child will be able to make real investments to save for their future.