You don’t have to be a Wall Street tycoon to teach your child the basics of investing. In fact, you only need to understand the basics yourself. By the time your child is around 12 years old, he or she should be able to grasp the concept of compounding interest.
One way to help explain compounding is ask your child if they want a $20 bill or a penny that doubles every day for 30 days. You better hope they choose the $20 because in 30 days the penny would be worth about $5.4 million. Although virtually no investment has an interest rate that high, your child will begin to understand how money can make money.
After they understand compounding, begin to teach them about different types of investments. You can even begin investing in some of these while your child is still in diapers. Your child may show more interest in learning about investing if he or she already has money invested.
Explain that bonds are certificates of debt issued to raise money for the government and corporations. Investors in bonds are lending money to these institutions to make more money in the long run. Explain that stocks are shares of ownerships in companies. You own stock in hopes that the company will profit so the price of your stock will go up. The best place for long-term investments is in the stock market. Explain that a mutual fund is money from individual investors, companies, and other organizations that a professional manager invests in some combination of stocks, bonds and/or other securities.
Help your child begin to understand the stock market by helping them start a mock portfolio. You can find sites on-line that allow you to track stocks for free. Have your child pick around 20 stocks and list the stock price, ticker symbol, and today’s date of each. Have them write down the price of each stock every day for at least a couple of weeks. Though this is does not actually show us how the companies are doing, this will help your child understand the basics of the stock market. They may also develop a deeper interest in how things work.