We all want our kids to be financially secure. Helping them understand passive income, compounded returns, and investing is an important way to set them up for a successful financial future. But try explaining these concepts to a kid, and they’ll be checking their Instagram account before you finish saying “assets.” While it’s easy to be deterred by this ho-hum reaction, if you don’t teach them these skills, you may very well end up still paying for that cell phone when they grow up. In fact, you wouldn’t be alone.
The best way to get them interested is to make the conversation relevant. My son’s middle school class was getting ready to participate in an online investment contest. The teacher started the conversation by asking the students where they might like to invest their money. One girl raised her hand and responded, “Justin Bieber.” This was met by cheers of support from the other girls and plenty of eye rolling and scoffing by the boys.
Despite my son’s dismissal of the idea, the girl was on to something. I explained to my son that Justin’s brand strength and ability to cash in on his brand are markers of a good company. If this is combined with a strong management team, you’ve got an interesting investment option. So, regardless of what you think of his music, he’s likely to earn royalties for years. In fact, several artists, including James Brown, the Isley Brothers and most famously, David Bowie, created bonds that were sold to investors based on the royalties from their catalogs.
While we can’t buy Bieber bonds (yet), we can apply this concept of relevancy and excitement to teach kids (and adults too) about investing.
Three Easy Steps to Get Them Going
First, simply explain the concept of investing. You can start by pointing out that there are public companies all around us. For example, Costco (or fill in with a retailer that’s relevant to your family) isn’t owned by one person, it’s owned by lots of different people who buy a part of the company. Each part of the company is called a share. When the business does well and makes a profit, the people who own the shares make money. When it does poorly, the shareholders lose money. Over time, as they get more acquainted with the stock market and see actual ups and downs, you can introduce them to the idea that stock prices are affected by the number of buyers and sellers, important national and world events, and other nuanced concepts.
#1. Make It Relevant
Have a conversation and ask your child to think of companies they notice are doing well now or could be doing well soon. Have them think about where they go (stores, activities, etc.) and the things they interact with throughout the day.
My 11 year old daughter put Apple on her list. She’s a brand loyalist and is surrounded by friends and adults who use all forms of the brand from Apple TV to Macs. As a fan of multiple YouTubers, one of the other companies she selected was Alphabet, Inc., formerly known as Google, because it owns YouTube.
#2. Help Them Become Stock Detectives
Explain that the next step is digging deeper to learn more than just what they see on the surface. It’s time for a little sleuthing:
- Look up the ticker symbol on Yahoo Finance.
- Have them click on the stock chart for 3 months, 1 year, 2 years and 5 years so that they can see that stock prices change over time.
- Point out these couple of key indicators:
- Price-Earnings Ratio (P/E) – this shows them that earnings give the context for the price of a stock. A stock price might seem high, but if the company’s earnings are strong, that may be the reason why. The P/E ratio helps determine whether the stock is expensive compared to how much money the company earns, not just whether the price is a high number.
- Price-to-Book Value (P/BV) – book value is what a company would be worth if it closed up and sold everything and then paid all their bills. It’s like net worth, but for a company instead of an individual. This is another good comparative statistic.
#3. Get Them Going
I think it’s great that my son’s school held an investment contest. The downside to these is that they are usually short term. By investing together at home, you can set up long term holds so that they see the ups and downs, feel the emotional elation and deflation of changes in stock value, and experience the benefit of re-investing gains and/or dividends.
Another way to make it relevant and keep it top of mind is to have updated information on their selected stocks on their computer or handheld device. Yahoo Finance offers a free app. My son set this up so that he can easily track his investments.
While you may not be able to invest in Bieber Bonds, teaching kids about investing will make everyone’s life easier in the decades to come—especially since you’ll be off the hook when it comes to paying for their phones.