They’re not quite ready to get into the London Stock Exchange, but it’s certainly not too early to get them started with the concepts involved in stock market investing. Of course, you have to bring the concepts down to your children’s level of comprehension. You cannot get all technical about the whole thing or they might simply opt for the telly. The assumption is that you have already taught them about the value of money and that they understand the need to grow money.
While money does not necessarily grow on trees, you can certainly put them in financial instruments that will allow them to grow over the long term. The kind of stock market investing that you have to teach your children is the kind that evaluates risk and projects long term returns. Randomly choosing stocks and putting money in them without careful analysis is teaching them to gamble.
Start by explaining what the stock market is. It is essentially a place where you buy and sell stocks of companies. Stocks are shares of ownership in a company. When you buy stocks, you are buying part of the company. This means that when the company makes money, you make money too. But when it loses money, you will lose money too. This is why you have to be careful with the companies that you choose to invest in. You also have to watch the performance of the company so that you know when it’s starting to get in trouble so that you can get out and enjoy your earnings before things start going downhill.
Younger kids should understand the concept of risk and return. These are important elements of stock trading. Any investment involves risk. Your child might ask why you would want to invest money if there is a risk of losing it. The answer is that the potential for returns is also great. To lessen the risk, you just have to keep your eyes and ears open for news about the companies you have invested in. This will get your child interested in business news and learning about how the various companies are doing. You can watch the news and read investing websites together and then discuss your thoughts about whether or not your stocks are doing well. Eventually, you can open a trading account for your child and let him choose which stocks to invest in.