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The ABCs of Investing: Teaching Your Kids About Money and the Markets

Children need to understand what stocks are, why people invest, and how markets work before they can understand investing.

“The best way to get kids interested in investing is to speak their language,” said Carrie Schwab-Pomerantz, financial literacy expert and senior vice president at Charles Schwab & Co. “Start by explaining that investing is a way to use your money to try and create more money. “

There are many good resources – websites, apps, books – available to help guide discussions with children about money and investing (or to help build parent knowledge). Among them: “A Kids Book About Money” by Adam Stramwasser and Schwab MoneyWise.

TRAINING

If they seem ready, let the kids try the investment.

Consider one of the many apps and games that allow people to simulate investing experiences. These are a good first step in a secure environment, said Paul Golden, spokesperson for the National Endowment for Financial Education.

Try one that shows gains over a long period of time, 10 or 20 years, as this better illustrates the benefits of long-term investment.

Parents can also help kids identify businesses that interest them and keep track of them using play money just for the fun of it. This presents an opportunity to explain why a stock can go up and down in value at different times.

“If you encourage your child to buy stocks, help them understand and have a perspective on why they should buy a stock,” said Louis Taylor, president of Taylor Wealth Management in Oregon and father of. two children.

You don’t need to explain balance sheets, price / earnings ratios, or anything technical yet. Just help them to think more clearly about their decision-making process.

Taylor took this approach when several students approached him while preparing for GameStop to ask if they should invest. Instead, he asked them why they would invest in GameStop if they didn’t even shop there. He was able to help them conclude that perhaps there was little underlying value in the business.

“I think you should buy stocks, but know why you are buying them,” he said. “If you’re passionate about (a stock) because you believe in a brand, that’s one thing. Don’t do it because you’ve seen it on a bulletin board.”

Some parents open custodial brokerage accounts, which can be used to invest in stocks, bonds, mutual funds and more. The property belongs to the child, but the adult retains control until he reaches adulthood. Some parents allow children to have a say in how they are invested as a learning opportunity.

Jordan Wexler, CEO of EarlyBird, a funds-in-trust app, said linking the concept of investing to something in their real life helps it come to life.

“Talking with them about their preferred interests and activities can lead to a much larger conversation about investing in valuable businesses in a way that makes sense to them,” he said.

TALK RISK

If the kids were intrigued by GameStop, speak up.

Don’t you understand it? Here’s a quick recap: GameStop is a struggling physical video game retailer. Some hedge funds and other big investors didn’t trust it and “shorted” the stock, essentially betting that its stock price would drop. But some small investors have decided to push the price up by buying.

When a stock is very heavily shorted, a rise in its price can force short sellers to exit their bets. To do this, they have to buy the stock, which pushes the price even higher and can create a feedback loop. While GameStop’s short sellers were in a hurry last month, small investors and new investors have used online forums to encourage each other to keep the momentum going.

The stock traded below $ 10 for most of 2019 and 2020. This “short squeeze” took it above $ 480 last month before falling back to around $ 40 on Thursday.

Yes, some people have made money. But some people have also lost big.

Take the opportunity to talk about how different investments involve different levels of risk. Riskier investments can lead to big gains, but also big losses. Also mention how some investors might be able to bear these losses more than others.

THE LONG GAME

Ray Medeiros said he has long spoken to his boys – aged 16 and 18 – about the importance of investing to build wealth. He feared they would be sucked into GameStop’s quick cash lure. But he explained to them that investing is a long-term business. He also urged them to always think less like a day trader, who often loses, and more like Warren Buffett.

“I told them if they wanted to invest in high risk, do it with money that you won’t miss if you lose everything, much like scratch tickets,” Medeiros said.

Jacklynn Manning has kept it simple for her boys, ages 9 and 10. She explained some basics of the stock market, including how non-professional investors can “make a good profit if you play smart and cautiously, or maybe a big loss if they are too gluttonous.”

Kids, especially teens who are on social media, have paid attention to GameStop primarily because people are talking about it on the social media platforms they interact with. Teach them to distinguish between good advice and bad advice. And remind them that you can’t trust everything you read online.

Parents should also recognize that investing looks different these days. Robinhood, for example, has been accused of trying to attract young people with little or no experience in stock trading by including features on its trading platform that resemble gaming apps, such that showering a user’s screen with virtual confetti every time they make a trade.

The company has defended its practices and notes that it makes educational tools available to its customers.

“While this is a great time to learn, parents should stress that investing is not a game,” Golden said. “Investing helps achieve long-term goals. “