Teaching Kids
About Investing
by Robert Coplan & Robert Garner
Ernst & Young
Financial Planning Reporter
Stock-picking contests for youngsters
are proliferating like new Internet stocks, but some of them may not be
teaching kids the lessons they need to learn about investing. Many of the
competitions seem to encourage speculation, frequent trading and a swing-for-the-fences
mentality. If it doesn't have the rocket-like potential of an Internet stock,
why bother?It's
fine to try to win such contests, as long as young participantsand especially
the winnersrealize that more disciplined approaches to investing tend to
work better in the long run. Here are some effective ways to teach your
child about investing in the market. Sooner or later, he or she will need
to know. Generally speaking, sooner is better than later. Many seven or
eight year olds can grasp the basics.So
how can you show your kids that the stock market is worth their time and
attention in competition with schoolwork, TV, sports, etc.? First, focus
on stocks rather than mutual funds. Although it's fine at some point to
discuss the importance of funds and how they reduce risk through diversification,
focusing on S&P 500 index funds is probably not the way to start off
if you want to make investing intriguing.A
better idea. Begin by discussing
companies in industries that are familiar to them. Round up the likely suspectsmovies,
soft drinks, fast food, technology, clothing, theme parks, electronics,
sneakers and toys. You might expand to retail outlets they've encountered,
such as Toys-R-Us, Wal-Mart or Home Depot.What
if your child is interested in the products that some of these companies
offer but not in the businesses themselves? Then try a back door approach,
focusing on the sizzle rather than the steak. Pick a stock and have your
child follow its progress in the newspaper or online. (As many investors
know, this can be one of life's simple joys, like reading baseball box scores.)
Show him or her a historical chart of a company that has performed well.
These are indeed pictures that are worth a thousand words. A fringe benefit
for younger childrenfollowing a stock in this manner reinforces skills in
reading graphs, as well as in multiplication, etc. (e.g. 200 shares of a
$38/share stock will cost $7,600).The
background. Tell your child that
buying a stock gives him or her an ownership interest in a company that
is real, not pretend or theoretical. Then briefly explain that companies
decide to sell shares (or little pieces) in their companies to the public
to raise money so they can grow and attract more customers. While some companies
focus their attention in the U.S., many of them seek customers throughout
the world. When McDonald's went public in 1965, for example, the chain had
about 700 restaurants. Today there are more than 23,000 McDonald's restaurants
in 109 countries.The
risks. Clearly explain the risks
of buying stock in a company. If the business they invest in doesn't make
as much money as other owners expect, their shares will lose value. If the
business fails, their shares may become worthless. The upshot: they should
learn as much about companies as possible before investing and, when they
do invest, they should concentrate most of their (or your) hard earned dollars
in companies that have a strong chance of being around decades from now.Choosing
that first stock. Form an investment
team with your child and bat around ideas. Ask questions about favorite
products and services. You may get some great investment ideas for your
own portfolio in the process.But
warn your child against chasing fads, especially fashion fads. What if your
child insists on buying something highly speculative? Two different approaches
make sense. You could allow him or her to buy a small amount of the stock.
If it blows up, that could teach a valuable lesson. It's better to throw
away $100 at age 11 than $25,000 at age 35.A
reasonable alternative. Your child
could track the speculative stock's performance on paper or online without
actually investing a penny. This can also be instructive.Compile
a list of investment candidates and then choose one or several stocks to
invest in. Ask leading questions, but consider letting your child make the
final decision, unless you have a strong feeling that Stock A is better
than Stock B. That will make it more exciting for him or her.In
some ways, of course, the stock market is just like a candy store. You can't
buy everything you want. Solution: Suggest that your child track a paper
portfolio as well as a real one. You may have an existing portfolio in your
child's name that you have chosen not to discuss with him or her. This new
investment program need not affect these other assets.Buying
the stock. Whose money should be
used to purchase the stock? Ideally, your child should invest some of his
or her own savings. This is meant to be a real-world experience, after all.
But there's nothing wrong with using your own money to give the child a
head start, especially if there is not much in a savings account yet.To
buy a small number of shares cost-effectively, you could: