The fundamentals to teach children about stocks
▶ As zero-commission trading surges, young investors need to understand the basics, reports Deepthi Nair
When global stock markets plummeted last March after the outbreak of the Covid19 pandemic, Will Rainey decided it was time to teach his two daughters, Imogen, 8, and Florence, 6, about investing.
The founder of Blue Tree Savings, a company that helps parents teach their kids about money, used the example of McDonald’s to teach his children about investing in the stock market.
“We were sitting eating our burgers and I said: ‘You see all those people paying for their food? Some of that money is yours as you own a piece of McDonald’s’,” he recalls.
The British expatriate, who is currently based in Vietnam, helps his children invest in equities through a global equity fund on investment platform Vanguard. His daughters have chosen a fund that avoids investing in companies that are not eco-friendly because they are learning about the environment at school, Mr Rainey says.
The tragic case of Alex Kearns, a 20-year-old American college student who killed himself last June after mistakenly believing he had lost a fortune to online trading app Robinhood, raised concerns about the safety of online trading for inexperienced investors.
It also highlighted the importance of teaching young people how to invest as the zero-commission trading trend continues to surge, according to experts.
Mr Rainey, a qualified actuary, uses the power of visualisation to teach his children about investing, comparing the process with planting a tree. “This helps them realise it takes time for a tree to grow [just like it takes time for money to grow] and when it grows, it will produce more seeds, which create new trees,” says Mr Rainey, 39.
“This visualisation also helps them realise that when there are storms [a market crash], trees can get broken but if you leave them, they will grow back bigger and stronger. This is a key lesson for anyone who is thinking of investing.”
Mr Rainey recommends children read The Four Money Bears by Mac Gardner to introduce them to the four basic functions of money, while Unshakeable by Tony Robbins will help parents learn about investing in a simple manner.
Parents should help their children invest in a global lowcost fund to give them exposure to thousands of different companies, Mr Rainey says. It also makes sense for parents to start with companies their children are already familiar with as examples of how businesses earn and grow money over time.
“Teaching kids about the stock market helps them learn that money can grow and be used to earn more money,” he says. “They will have an advantage in life as starting to invest from an early age allows them to start their journey to financial freedom.”
Here, we talk to experts about how parents can help put their children on the path to savvy investment decisions to secure their financial futures.
Set the stage
Children need to understand what stocks are, why people invest and how the markets work before they can understand investing.
Parents should help them understand compound interest and the positive impact it will have on the growth of their investments. In turn, this helps them accelerate their journey to reaching long-term goals, says Christopher Davies, chartered financial planner at The Fry Group.
“Introduce them to the power of compounding and deferred gratification as these are the powers behind investing,” says Adrian Lowcock, head of personal investing at investment platform Willis Owen.
To teach the lesson, Mr Lowcock suggests using an example from the real world. “Give them some sweets, for instance, and offer to raise it by 10 per cent each week on the amount left. The more they have, the more they get at the end of the week.”
Make it fun
Children learn through play, so games, either linked to investing or money in general, can teach them about investing, Mr Lowcock says. Although the board game Monopoly focuses on property, it still teaches children about investing.
“Board games can be a great way for a playful approach, with Robert Kiyosaki’s game Cashflow offering a first insight into the world of managing money and investments,” Dino Ibric, vice director at Swissquote MEA, tells The National.
Books such as How to turn $100 into $1,000,000: Earn! Save! Invest!, The Motley Fool Investment Guide for Teens and I’m a $hareholder Kit – The Basics About Stocks for Kids & Teens can get them started.
Mr Davies also recommends the Practical Money Skills website, which has information, games and guides aimed at children and is a great starting point for parents.
Start early
Begin by making savings and investment a habit as soon as possible and reward children for adopting it, Mr Davies says.
“Even small saving contributions can have a big impact in the long run,” Mr Ibric points out. “Despite the current low interest rate environment, the effect of compounding interest is as important as ever.”
Low-cost exchange-traded funds are a great way for young investors to spread their cash across a basket of underlying assets. Participating is easy and can be done with small and recurring investment amounts, he says.
Children should also be taught the concept of “pay yourself first” and learn how to allocate a certain percentage of their pocket money to their savings/investment account before spending on anything else, Mr Ibric says.
Start a portfolio for them
Parents are encouraged to open a demo account with virtual money to show children the visual aspect of a held stock moving up and down, depending on the market conditions.
“It is good to have a safe place to try things out and get familiar with investing without taking the risk of losing lots of money,” Mr Lowcock says.
“Parents should help educate their children on why certain investment decisions are made then let them play out, with a small amount of money, learn from the mistakes and celebrate the wins,” Mr Davies says.
When the child has a basic level of understanding, parents can let them invest into a real product or portfolio and give them a jump start by providing initial funding for their first investment, Mr Ibric says.
It is important for parents to keep their children involved and let them see their money grow to keep them interested. Talk to them about why you made a decision or the types of companies you are investing in on their behalf.
“Discuss the difference between short-term, medium-term and long-term goals and how saving can help them in the long run,” Mr Davies says. “Also discuss the idea of risk and reward.”
Children can be allowed to select their own investments, but over time discussions should include the background of companies, management approach, price to earnings and other factors to analyse successful investments, Mr Davie says.
This will make the journey interesting rather than a potentially large amount of theory.
“Try to keep the language appropriate and suitable for the age and talk about companies they may have heard of, for instance, Spotify or Netflix,” Mr Lowcock suggests.