Currently, the New York Stock Exchange has a total capitalization of $15 trillion. That’s a higher monetary value compared to all of the money in the US Treasury. How can this be? Due to the amount of companies that are represented in the stock market, and the number of shares and investors they have, the total capitalization ends up being a total of $15 trillion. That’s higher than any lottery will ever be. Without the stock market, companies would be limited in developing products and services that improve our lives; such as medicines, power, and entertainment.
It is important that kids care about the stock market at a young age because young people are the future leaders of this country. By teaching them financial literacy on buying, trading, and investing in stocks, then we are preparing them for the future.
In order to do this, we must first simplify the process to make it easier for your kids to understand. First, explain to them what the stock market is, why people buy stock, why they should care, and how to trade and invest. Children have brains like a sponge. The younger you teach them, the more their brain will absorb and retain information, thus making it better for their future understanding. Whether you have a kid in elementary school, middle school, or high school, now is the time to get your kids to care about the stock market.
What is a stock?
A stock is a type of investment. When you own stock, you are a shareholder, and own a part of a company’s earnings and assets. When you purchase a company’s stock, then you are purchasing a small portion of the company, called a share. Those who play the stock market purchase shares of companies that they believe the value will increase in. If you purchase stock and the value of that stock increases, then you can sell it and make profit.
Companies sell shares of stocks as a way to raise money to grow their business. They do this to increase cash flow and therefore generate more revenue and increase value. Companies sell their stocks through a stock market exchange, the largest ones in the US being the New York Stock Exchange (NYSE) or the NASDAQ. At this exchange, shareholders buy and sell among themselves while the stock market tracks the supply and demand of each company’s stocks.
Why should kids care about the stock market?
If you could reverse time to when you were a kid, wouldn’t you want to know more information on how to invest and grow your wealth? At this point in time, apps and technology make it easier than ever to buy and trade stocks. People who teach their kids about the stock market are preparing their kids mentally to build their personal finance. When kids have a basic understanding of how the stock market works, they become financially intelligent. Additionally, it is a great way for your children to build their financial goals and save for future expenses such as college, cars, and houses.
How can we teach kids about the stock market?
Get your kids to care about the stock market by teaching it to them in a way that they will understand. In an article written by Beth Kobliner, she suggests getting a copy of The Little Red Hen and reading it to your children. In this book, it tells a story of a hen who invests its time into making bread. The other animals at the farm refused to help her, so when it came time to eat, the hen did not share its portions with any of the other animals, resulting in a lesson learned.
The idea behind how to teach your kids about investing in the stock market is to get your children to think long term. If they practice habits that will benefit their future now, such as learning the idea of investment, then growing their wealth in the future will be much more simple. There are other ways that you can teach your kids to care about the stock market while they are in elementary school, middle school, and high school, too.
Get them started in elementary school.
Start by learning your child’s best interests. Does he or she love Disney, sports, cartoons? Whatever it may be, use their interests as ways to get kids into investing. For example, if your child is watching their favorite Disney movie for the tenth time, let them know that they are only able to watch it because a company created it. In this case, the Disney company.
Explain to your child that the Disney company needs money to make their favorite movies. To make that money, the company sells stock to people, thus making them a shareholder of the company. Your child will be ecstatic to know that they can possibly own their own piece of it. The next step is to teach your kids to invest in a variety of stocks. By betting all of your money on only one stock, then your risk factor increases.
Let's say your Disney-loving child watches a different Disney movie a day. Give them the scenario that if they put all of their money into one movie, they can only watch that one movie for the rest of their life. By sharing their money to multiple movies, they are able to watch a variety. Allowing your children to relate this idea to their lives gives them a better understanding of how stocks work, and the risk factor behind investing into certain ones.
Reinforce lessons in middle school.
In middle school, children have a more keen sense on the idea of money. As they are grasping the idea of money and what it means to make money, it is the perfect time to teach them about the stock market—especially since it is not part of their curriculum. First, teach them about compound returns and how they can build your wealth. Compound returns happen when you invest your money and earn returns on it. With those returns, you can reinvest and make money on them, too. Repeat this cycle and your money will grow rapidly over time.
Since middle school kids are developed enough to know math calculations, the best way to teach them this is through a compound investment calculator. Give your child a hypothetical situation, or use their allowance as an example. Explain to them with their $10 weekly allowance, if they were to save it over the course of 50 years, that $10 can multiply and become up to $60,000. The thought of building this money at a young age will get your children excited to start saving. Multiplying your money is very realistic, and your kids should know this at a young age.
Give them tools to invest in high school.
Now that your child is in high school, they have a full understanding of money, where it comes from, how to make it, and how much is a lot. It is extremely practical for high school students to learn how to optimize their savings and turn it into an investment.
Unfortunately, learning taxes and stocks are not required within the high school curriculum, so it is up to parents to teach their children the ways of the stock market. If your kid has a part-time job, have them open a Roth IRA. When you create a Roth IRA at such a young age, money will multiply rapidly, and grow, free of tax. While this money builds, you can spend time with your kids researching and theorizing about the best ways to further invest or spend their money once they reach retirement age.
Now that your kid has built their Roth IRA, they have enough money to begin investing. They can do this several ways; including index mutual funds, exchange-traded funds, real estate, commodities, etc. With these options, kids are able to formulate the most effective plan they can come up with in order explore ways to become a millionaire by 30. Safer options include an index mutual fund, which is operated by experts choosing which stocks to invest the money in, while an exchange-traded fund (ETF) is a smaller buy in that allows money to be invested in funds, such as Vanguard Total Stock Market.
Get your kids to invest what they believe in.
It is a proven fact that young people tend to invest in companies that they believe in, and they think are worthy. This is a great practice because that means that young people are socially responsible. Instead of investing their money in tobacco and alcohol industries, they may invest their money into wildlife preservation funds or energy conservation. If kids care about the stock markets now, it will not only be beneficial towards their future, but quite possibly for the betterment of society and its economy.