How to Teach Your Child About Investing

The basics can be taught when kids are quite young

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Are you teaching your children about investing? As they become aware of money and other financial concepts, it’s important to familiarize them with investing and arm them with the know-how and tools to take with them into adult life.

Key Takeaways

• Opening your child’s eyes slowly to how markets work will demystify the process of investing and make it feel more accessible to them when they’re older.
• Start by teaching them the basics of risk versus reward, stocks and bonds, and profits and losses.
• If you own stocks, explain why you chose to invest in those companies and consider including your child in keeping an eye on the stock and company news.
• Let your child pick out a stock and either buy a few shares for them or set up a model portfolio so they can make some trades on their own.
• As they get older, encourage your kids to invest their money in a mix of stocks, bonds, and a savings account that you can help manage while they take the lead.

Start Simple With a Savings Account

One of the first ways you can introduce children to finances is by opening a savings account for them. As they earn money, encourage them to put it away in their account. This will demonstrate that they can safeguard their money while also generating a little bit of interest income if they do not spend their money.

This also encourages building relationships with financial advisors. Though your children may not have much to contribute, they may still need to go to a branch to deposit a small amount of cash. This encourages them to work with branch tellers and enforces that there are professionals that can help them on their financial journey.

Discuss Stocks and Bonds

Stocks are classified as high-risk investments. Along with that comes the potential for high returns. In time, you’ll want to address investments like this where a stock’s value can go up and down and that you can’t always predict the effects of the associated risks (as opposed to the consistency of an interest rate earned in a savings account).

If someone has given your child a financial gift like a U.S. savings bond, it can be a great jumping-off point to explain how this sort of debt security works. Remember, a bond is a low-risk, low-return investment. Bonds generally pay a small amount over the prime interest rate and are backed by stable institutions, usually banks or governments.

You can introduce your kids to these investments by telling them about purchasing lower-rated bonds that may offer better returns in exchange for higher risk. Make sure you advise them of the potential for the institution to default and that they can’t necessarily count on getting the income they may expect.

Note

You can set up an account for your child to put investments in where earnings can grow tax-free if they are used to pay for future tuition.

Keep Your Child’s Attention

One of the best ways to get your children interested is by getting their attention with things they may already know. Get them into the spirit by teaching them about popular companies like Nike or Apple. Alternatively, speak to their interests. If they’re interested in planes, for example, introduce them to a company like Boeing. If you own stocks, consider showing them the companies that make up your portfolio.

Take the time to explore the investor relations pages of different companies together to learn more about what the company makes, how much it earned that year, and how many people work there. Then ask your child what company stock they would like to buy. Young as they are, kids often know corporate names and have favorite firms. Disney may be popular with some children. 

Track Some Stocks

Once you introduce your kids to basic concepts, sit down and let them select a company. If you have the money, buy a few shares in the stock and then check the investment together at least once a week to show how it can rise or fall. If you don’t want to take that risk, consider making a simulated online portfolio and tracking stocks for fun, without the expense of purchasing shares. You can start out with Investopedia’s Stock Market Simulator, which is free to use.

Important

If you pick stocks with your children when they are young, they’ll experience the up-and-down cycles of the markets. This may better prepare them for the reality of fluctuations and help them make informed decisions when they grow up.

Let Your Child Invest

Give your kids the basics of investing when they are younger. As their knowledge expands, you can provide them with a more in-depth explanation of stocks and other investments. Let your child buy their own stocks at some point, especially if they have some cash in a savings account. Part of teaching them is ensuring they don’t put all their eggs in one basket, so suggest investing a third in each and keeping a third in savings. This also helps them compare the returns of different investments.

What if your child doesn’t have any money to participate? There are a couple of options:

• You can use your own cash to open a small brokerage account where your child can make investments
• You can build a model portfolio of stocks that your child wants to buy someday
• You can use a portfolio simulator to mimic what certain investments could turn into

There are several ways to open a brokerage account for a minor.

Another thing to decide is whether you want to introduce your child through an online broker—some are especially good for beginners. Depending on the brokerage, you may be able to open a custodial account in the name of your minor child and give them the right to trade in it online. As the adult, you would remain the official custodian. As with anything else, check with a tax expert for the best option before you start.

Learn From Current Events

As your child develops their favorite products or hobbies, have them think through how changes with those products may result in changes in their investments. For example, imagine a child who loves playing video games. Let’s say Microsoft then releases a poorer earnings report where fewer Xbox consoles were sold than expected last quarter. You can tie these items together by having your child think through what the impact will be to Microsoft’s stock.

By extension, this can also expose your child to other industries they may not know about. For example, let’s say Microsoft sold less consoles than expected but their stock still generated a 20% spike upwards after their earnings release. Ask your child why that could’ve been, what other products could have outperformed, or what other things are going on in the world could have resulted in this. The goal of this is to have your child think a bit broader about all the items that come together to drive a company’s stock price.

When Is the Best Time to Introduce My Kids to Finances?

The earlier you start teaching your kids about finances, the better. You may want to start by opening a savings account. Get them excited about saving their money by putting it into the account and watching it grow. As they get older, you can open up the dialogue to more significant topics, like stocks and bonds. At some point, it may be wise to show them your investments and either let them use a simulator or open an investment account for them, too. Taking a hands-on approach when they’re ready will expose them to the ups and downs of the market. Be sure you monitor them so there are no surprises.

Why Is Financial Literacy Important for Kids?

Financial literacy is important for everyone. But it may be even more important for young children. Teaching them about money, money management, and investing at an early age can help them achieve financial freedom and success later in life. Starting small with teaching them about saving can lead to more in-depth topics like the basics of investing, which may help them make more meaningful decisions about their money and finances as they get older.

Can I Open a Trading Account for My Child?

If you’re confident enough, you can open a trading account for your child. Most brokerages require you to open a custodial account. This type of account lets you open it in the name of your child and give them the right to trade online. Keep in mind, though, that you are the one who is ultimately responsible to manage and invest in it.

The Bottom Line

It’s important to allow your child to make real decisions and take real risks. Your child may lose money, but the purpose of the exercise is to familiarize them with investing, and part of that is learning that investments have advantages and disadvantages. Whatever the outcome, the experience of following their investments and gaining and losing money—whether actual or theoretical—will be invaluable.