Your kids can learn life lessons from investing and trading in stocks — here's how
Trading stocks has become much easier for young traders in the last few years – thanks to fintech apps like Robinhood and Greenlight.
Robinhood, for example, drew unprecedented levels of young, first-time traders to the stock market during the pandemic.
The rise of such trading platforms that allow kids to buy stocks can be viewed as "a great opportunity" to get them "curious and excited about personal finance," said Thomas Henske, a certified financial planner.
As the markets continue to be more and more accessible to everyone, what can kids gain from learning to invest and trade? CNBC Make It finds out.
Start learning young
Robinhood has faced its fair share of criticism for the "gamification" of investing – or making the serious business of investing appear fun and intuitive like a game. Billionaire investor Warren Buffet has even likened it to gambling.
The earlier a person understands how to invest, the better chance of that person investing in the future.Tania BrownCertified financial planner
Still, industry experts who spoke to CNBC Make It said it will be beneficial for kids ages 8 and up to be exposed to the stock market.
"Teaching the basics of investment exposes your kids to understand how businesses work, [how to] grow money, and hopefully, ... how to make wise investing decisions," said Tania Brown, a certified financial planner and financial coach at SaverLife.
Children also have a "valuable asset" that adults do not — and that's time, added Jerremy Newsome, the CEO of Real Life Trading, which teaches kids, parents and adults about the stock market.
"Children, and even adults, are learning about stocks and investing way too late. I have heard so many people telling me they wished they learned when they are younger," he said.
Understand 'risk and reward'
The ups and downs of the stock market can be intimidating even for adults, how much more so for children. But both Henske and Newsome say that volatility is precisely why kids should start investing at an early age.
"One could say that there are several non-money benefits in the life lessons that stock market volatility incurs," Henske explained.
"Stocks can be a metaphor for life in several respects. Life is not a straight-line. [Children can] learn about risk and reward … and think long term."
For Newsome, learning about trading and investing is also a way to expose children to "reasonable adversity" and build "introspection."
"When you make a trade — it doesn't matter if it's real money or fake money – and you lose, there's a certain feeling that happens. You get upset or angry or annoyed or frustrated," said Newsome.
This gives children the chance to learn how to recognize and understand emotions and then "shift" to a more positive state, building "emotional intelligence."
Newsome added that learning how to trade stocks is also a way for your children to better "practice math" and see it incorporated in real life.
"When kids are going through school, they don't know how the math they're learning is going to help ... or benefit [them]."
Stocks can be a metaphor for life in several respects. Life is not a straight-line.Thomas HenskeCertified financial planner
"In the stock market, you don't need to be a math expert by any means, but you generally do have a good understanding of percentages, decimals, multiplication, addition, subtraction — those really core math principles are very prevalent in trading," said Newsome.
Investing for the future
Teaching children to save part of their allowance is one way to ensure they are financially savvy in the future. But experts who spoke to CNBC Make It said that learning how to "grow wealth" through investments is equally important at a young age.
"The earlier a person understands how to invest, the better chance of that person investing in the future," said Brown.
Henske agreed, saying that there is "power" in starting early and it is important to keep "the end in mind" – for some, that could be retirement.
He pointed out that investing is important for those trying to achieve their retirement goals.
"Show me someone who is an amazing saver and only gets 5% on that savings, and I'll show you someone who has a better financial path … [and] gets 10% on their money."
Learn to save first
However, Brown stressed that kids should first understand the basics of finances before learning to invest.
"Start with … saving part of their allowance, and learning to delay gratification. These skills should be taught, practiced, and used before moving on to investments," she said.
Henske concurred, saying that children should have personal finance topics "nailed down," such as understanding the value of money, budgeting, savings and compound interest.
That's why he thinks it's more "productive" to start talking to kids about investing only when they're in their "tweens" — between the ages of 8 and 12.
"When the topic of investing comes up, parents often times get excited and want to jump right into teaching kids to buy stocks. In my opinion, that is not the place to start," he added.
"What good is teaching them to become a master investor if they can't even save any money? Last time I checked, a 20% rate of return on $0 is $0."
Henske's advice to parents is to expose kids to the topic of investing early, but "don't be discouraged if they don't start being receptive to those lessons until they hit high school."
How should kids start investing?
Allow your child to pick a company of interest, so that he or she will be more of a "willing learner," said Brown, who added that her own daughter picked Walt Disney.
Newsome suggests "investing in what you know." These can be companies with goods and services you use every day such as Apple, Netflix or Google.
"Don't worry about investing into a new start-up company that you've never heard of before," he said.
Brown added: "You can buy stocks directly from the company and purchase low shares, then walk your child through how to evaluate the stock. Remember, the goal is not a stellar investment return, but rather to teach your child the basics of investing."
Conversely, Henske said that parents should encourage children to invest in mutual funds and exchange-traded funds (ETFs), rather than individual stocks, because it's unlikely that children or young adults have time and energy to do "proper due diligence" across various asset classes.
Mutual funds pool money from investors to invest in a collection of stocks, bonds and other assets, while ETFs hold a collection of securities that track an index, commodity or bonds.
"It is highly doubtful that they would be take on such a Herculean set of tasks and perform well as a newly minted adult."
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