Since my daughters were very young, I have been investing money in the stock market for them. Each month we’d show them how much we have saved for them. However, instead of showing them a monetary amount invested, we’d show them their investments as trees, or Blue Trees as we call them. They knew that these Blue Trees would grow over time but I never said what they represented as I thought they were too young to understand (most adults don’t understand the stock market!). Then, when my eldest turned 7 years old, I thought “Why don’t I give it a try?!”. I was going to attempt to explain the stock market to a 5 and 7-year-old!
The conversation went much better than expected. They asked some great questions and thought of their own examples. It was truly amazing. Granted I didn’t go into all the details but despite their young age I believe they know much more than most people do today.
Given the success with my children, I started speaking with friends and their kids. They seemed to get it and asked great questions too. Therefore, I thought I’d put a little guide together to help other parents teach their kids about investing in the stock market.
This is my 5-step guide to teaching your kids about investing in the stock market!
Step 1 – Investing is owning a piece of a company
To help explain the stock market to your kids, pick one of their favourite companies. Whilst I’d never suggest investing in just one company (I’ll come on to why in step 5), using a company they know to explain the stock market makes it easier and a lot more interesting.
To help with this guide I’ll use Disney as I know pretty much all kids love Disney. [NOTE: I’m only using Disney as an example to explain the concept of the stock market. I’m not in any way recommending that you invest in Disney].
First explain to your kids that if you invest in Disney it means that they own a piece of Disney! They would own a small piece of the all the Disney films (including Frozen!), the theme parks, Star Wars and the toys.
You can explain that every time someone goes to the theme parks, some of the money they used to buy the tickets would be theirs as they own the theme park. So rather than just being the ones giving money to Disney, they’d actually be the ones getting money from Disney. Granted it would be a super small amount they own but they don’t need to be put off by that.
The same applies if they invested in Apple. They would get a piece of the money when someone buys an iPad. I used McDonalds with my girls as we could eat our burgers and watch all the people at the till buying their burgers and get excited as we owned a part of it!
Step 2 – Investing is expected to make more money
They might be excited by the thought of owning a piece of their favourite company but we need to explain why we want to own it.
The short answer is to make more money. However, we need to help them understand why we expect them to make more money.
Here’s how to explain that the money you invest is expected to make more money in the future using Disney:
- The money you invest is given to Disney
- Disney uses that money to create new movies, design more toys and open new theme parks
- These new (or improved) offerings help Disney to grow and attract more people to spend money on Disney, i.e. Disney earns more money than before
- If you own a piece of Disney, then the more money Disney makes, the more money you make!
Essentially, the money you invest helps companies grow and if they grow your investment goes up in value.
Step 3 – Explain that sometimes investments can go down in value
When I was explaining the stock market to my daughters it was right at the start of the Coronavirus pandemic. The stock market had just fallen significantly so it gave me a really good example to help explain the risks of investing in the stock market.
Whilst we expect companies to grow and make more money over time, there will be times when they won’t.
Using our Disney example, during the Coronavirus Disney theme parks closed, no one was going to the cinema to watch Disney movies or the shops to buy Disney toys. This meant that Disney was not earning as much money as before. As Disney was earning less money, it was worth less than before, i.e. went down in value.
This might lead your kids to worry about investing in the stock market. No one likes losing money. This is where you need to explain that different events will always happen but over the long-term things have always worked out fine.
Step 4 – SUPER IMPORTANT – The need to think long term
There have been many events which have led to the stock market falling, including two world wars. In every case, the stock market has recovered and those that kept on investing have gone on to see their money grow (if they follow step 5 below which I’ll come on to). It’s only those that have panicked and sold their investments when there has been a fall that have lost a lot of money.
Let’s consider the Disney example. Let’s assume the Coronavirus comes under control. People return to the Disney theme parks, go to the cinema to watch Disney movies and the toy shops to buy Disney toys. This means that Disney will once again be earning money and your investment is most likely to return to what it once was before the virus. Then in the future they will create new movies, design new toys and open new theme parks and earn even more money. So, whilst in the short term the investments went down, over time these can recover and make money again.
If your kids can learn (and accept) that the stock market can go down in the short term but can go up on the long-term, they are going to be better placed than so many other people who are investing today!
Step 5 – Don’t just invest in one company
As mentioned in Step 1, I don’t actually invest in one single company. Nor would I recommend anyone invest in just one company. We invest in thousands of companies (via a single low-cost investment fund which invests in companies on our behalf).
There are two reasons for my personal decision to do this:
- Some companies don’t recover so i’d lose all the money I’d invested in just them.
- No one knows which company is going to grow the most in the future so for me it’s best to invest in loads of them so I don’t miss out.
Here’s an example you can use to explain this to your kids:
Remember Blockbuster Video!?! If you invested all your money in Blockbuster video then you would have lost pretty much all of that money as they went bust. Essentially, no one wanted to leave their house to choose a film when they could just stream one from the sofa using Netflix.
Warning – if you use this example then you’ll have to explain to your kids what a ‘video’ is which will make you feel really old. It certainly made me feel like a dinosaur!
You can then go on to say you wouldn’t want to be the person who owned just Blockbuster as you’d have lost all that money. You’d want to be the person who owned a lot of different companies as there is a good chance, they would own Netflix, Apple, Google, Facebook as these companies turned out to be the ‘winners’ over a long term of time (not that people knew that in advance).
A practice example of why you should invest in lots of companies
When I was explaining this to my kids, my eldest asked me a question, which showed she was really interested. She said “Dad, doesn’t it mean that companies that go bust are just replaced by new companies?” It was a great question as it implies that if you own lots of companies then the money you make from the good ones is offset by the bad ones. This is something I know a lot of adults think as well.
This is where having some Lego or beads can help. Let’s say you have 10 companies and they are all worth 1 bead. If 2 of those companies go bust (like Blockbuster) then you only have 8 beads left. However, a good company can grow to become worth many more beads. For example, if one of those beads was Netflix, instead of being worth one bead at the start, it could grow to be 3 beads or more. Therefore even if 2 companies go bust, good companies can more than offset those loses over the long term.
By spreading your investments over many companies, you are much more likely to get a good return than those that just invest in one company.
Summary
There you have it. A 5-step guide to teach your kids about investing in the stock market.
Step 1 – Investing is owning a piece of a company
Step 2 – Investing is expected to make more money
Step 3 – Explain that sometimes investments can go down in value
Step 4 – SUPER IMPORTANT – The need to think long term
Step 5 – Don’t just invest in one company
Teaching your kids about investing in the stock market means that they will grow up knowing something that most people never learn (as it’s not taught in most schools). This is really important as most adults only hear about the stock market when it flashes up on the news when it has fallen in value and then they get too scared to learn more about the benefits of investing.
If you are saving money for your kids in a Junior Cash ISA, why not take some time to consider switching this to a Junior Stocks and Shares ISA Their money would be expected to grow by a lot more, especially given interest rates on savings accounts are so low. Whilst there is a chance that this money might fall in the short term (Step 3), if your kids are young then there is plenty of time for this to recover.
Please note – always consider taking your own independent financial advice based on your own financial circumstances. This article is not providing investment advice.
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