How to Start Investing For Kids

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Contributor, Benzinga
November 12, 2024

Teaching your children the tricks of the trade when it comes to investing can give them an edge later in life. Simple lessons could equip them to be better investors when they have some money of their own to invest. Encouraging saving and budgeting habits in kids is commonplace, but less emphasis is put on investing for kids. Read on to learn how to introduce your kids to the stock market.

Investing for Kids Early in Life Can Improve Their Financial Success

Investing for kids at an early age can be one of the best investments parents make. Not only does it help prepare them for financial success later in life, but it also reinforces good habits and teaches them essential money management skills while they're still young.

By starting to invest for kids when they’re young, parents are able to reap the benefits of compound interest on their investments which can add up to a significant amount over time. Investing early also helps parents set a good example for their children, demonstrating that money can be used to build wealth and achieve financial goals.

Investment Accounts for Kids

Before beginning the lessons on the stock market, you'll want to make sure an investment account is the right choice for your child. 

Saving vs. Investing

If you want to wait until your child has money set aside to teach them about investing, you could help them open a savings account. This would allow them to practice managing their money while working to save for investments in a few years.

On the other hand, invested money earns higher returns than saved money, although there is an element of risk involved in the former. If you think your child is ready to handle this concept of risk or has enough money saved away to learn it on their own, it may be a good time to teach them about investing.

You can also use debit cards to teach your kids about wise spending. These days, kids can manage money using something like the Greenlight Debit Card. As a parent, you can register for a Greenlight card, give it to your child and deposit money as needed. 

Your child(ren) uses the card just like any other debit card, and they can easily access their allowance, money they earned through a job or take payments for babysitting, etc. Greenlight also features budgeting and financial education resources. Kids learn how to do more than just deposit and spend money. Parents never need to worry about lost cash, and kids have just as much spending power as adults.

Asset Classes for Kids

There are several avenues or asset classes for investment, such as stocks, bonds, commodities, currencies and whole categories of derivatives. The easiest asset class for kids is equity or stock.

Stocks, however, are relatively risky compared to bonds, commodities such as gold and some safe haven currencies. However, children can connect better with stocks due to their association with companies, whose products and services children are familiar with.

How Old Do You Have to Be to Invest in Stocks?

At age 11, prolific and astute billionaire investor Warren Buffett bought his first stock from the money he saved working in his family's grocery store.

He did odd jobs while he was a teen and used the money he saved to buy stocks of local companies. Buffett’s first experience with investment came in the year 1941. Things have changed between then and now, most notably with kids being well informed via modern communication devices.

Depending on the type of brokerage account you open for your child, there may be an age restriction on if they can invest. This is brokerage specific, but parents can usually open a custodial brokerage account for kids under 18 years old.

How Kids Can Start Investing

Investment should be made as a family activity. Kids can join discussions concerning companies that form their portfolio, the moves of those assets, and more. When parents discuss their holdings with children, they should help them understand that investing in stocks is a risky business and therefore, it requires thorough background research and a clear strategy to avert or minimize any potential losses.

Step 1: Educate Themselves About Investing

Children should begin their learning about investing by understanding fundamental concepts such as stocks, the stock market, and key principles like diversification and risk management. Resources like books, online courses, and educational videos aimed at kids can be valuable tools.

Step 2: Set Clear Goals

Help kids consider their financial goals. Whether they want to save up for something specific, like a bicycle, or focus on building long-term wealth, having clear objectives can assist them in making investment decisions and planning strategies.

Step 3: Open a Custodial Account

Parents or guardians can assist their children in establishing a custodial account (UGMA/UTMA), enabling minors to invest in stocks under adult supervision. This account is registered in the child's name but is managed by the adult until the child attains legal adulthood.

Step 4: Start with Simulated Trading

Kids can develop their investing skills by using virtual trading platforms or stock market simulators before entering the real stock market. These resources enable them to buy and sell stocks with pretend money, helping them to build confidence and experience without any financial risk.

Step 5: Begin with Small Investments

When kids feel prepared, they can begin investing small amounts of money. This may involve purchasing fractional shares, if possible, or investing في index funds or ETFs, which provide diversification and lower risk. It is beneficial for them to periodically review and gain insights from their investments as they develop.

It's Never Too Early to Plan for the Future

Investing is an amazing way to teach children the importance of money and how our economy functions as well. If you are looking for helpful, educational resources to explain these topics, you can start with how the stock market works.

Frequently Asked Questions

Q

What type of investment is best for a child?

A

For a child’s investment, custodial accounts like a 529 college savings plan or a Roth IRA are often recommended because they offer tax benefits and support long-term wealth accumulation. Moreover, investing in a mix of index funds or ETFs can promote growth and encourage good financial habits from a young age.

Q

At what age can a child start investing?

A

Kids can start investing whenever, but usually, they begin making choices with help from a parent or guardian around 10 to 12. There are investment accounts like custodial accounts that let parents manage their children’s investments until they turn 18 or 21, depending on the state.

Q

Should a 12 year old invest?

A

A 12-year-old can start learning about investing with a custodial account managed by a parent or guardian, which allows them to gain valuable experience and knowledge about financial responsibility. However, it’s essential to focus on education and understanding the basics of investing before committing any money.