How to Teach a Kid About Stocks: Easiest Way To Explain Stocks to A Kid
When my 7-year-old son Jonathan asked how large companies operate, I saw an opportunity to teach him about stocks using his own business experiences. By relating investing concepts to his entrepreneurial ventures, I made the topic engaging and understandable for him.
This is the story of how I introduced my son to the world of stocks through lessons from his own journey.
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Jonathan’s Early Entrepreneurial Spirit
My son has always been a curious and enterprising child. When he was five, he decided to start his own company. He named his business “Jonathan Makes Money.”
What began as a playful endeavor quickly evolved into a series of small businesses that showcased his creativity and determination.
One winter morning, Jonathan noticed that the neighborhood driveways were covered in snow. He proposed that we offer snow shoveling services.
Armed with shovels and (his) endless energy, we went door to door, offering to clear driveways for. Although I provided the manual labor for free, Jonathan was the mastermind behind the operation, handling negotiations and customer interactions.
As the seasons changed, so did his business ideas. Spring and Summer brought his lemonade stand. He meticulously prepared batches of lemonade, set up a stand in our front yard, and greeted passersby with a smile. The venture was a hit, drawing in neighbors and hundreds of dollars.
In addition to his product-based ventures, Jonathan delved into trading sports memorabilia. He collected cards, autographs, and rare items, learning the art of negotiation and the importance of market demand.
Through buying and selling, he expanded his network and understanding of value appreciation.
Jonathan’s entrepreneurial journey didn’t stop there. With the money he had earned, he invested in a 3D printer. This opened up a new realm of possibilities. He began selling 3D printed things. One of them was a lemonade juicer that he would sell at his lemonade stand.
Each sale not only brought in revenue but also fueled his passion for technology and design.
Over the years, these endeavors have made him thousands of dollars in earnings. Jonathan didn’t just make money; he learned invaluable lessons about hard work, customer service, reinvestment, and the joy of seeing his ideas come to life.
Related: Teach your kid personal finance
The Curious Question: How Do Large Companies Work
Jonathan is now seven. Recently he said “Dad, I know how businesses work, but how do big companies make money?”
I realized this was a golden opportunity to introduce him to the fundamentals of the stock market and corporate ownership. But how could I explain such a complex system in a way that a 7-year-old would grasp?
The answer was right in front of me: use his own business as the foundation for the explanation.
Introducing the Concept of Stocks Through “Jonathan Makes Money”
I sat down with Jonathan at the kitchen table, pulling out a notepad and pen. “Let’s think about your company, ‘Jonathan Makes Money,'” I began. “Imagine that your business is worth $100 right now.
This value represents all the things you own in your business. For example your stock of lemonade ingredients, the shovel, and even the reputation you’ve built with your customers.” (I didn’t talk to him about future earnings, discounted cash flow, comps, etc. Come on, he’s seven!)
He nodded, visualizing the collective worth of his assets and efforts.
“Now, suppose you have a fantastic idea to expand your business. Maybe you want to buy a more advanced 3D printer or open a small shop to sell your items. The problem is, you don’t have enough money to do this on your own. What could you do?”
Jonathan thought for a moment. “I could save up more money from my sales,” he suggested.
“That’s one option,” I agreed. “But it might take a long time. Another option is to find someone who is willing to invest in your company. That means they give you money now to help you grow, and in return, they become part-owners of your business.”
His eyes widened. “Like a partner?”
“Exactly,” I said. “Let’s say you come to me and ask for $10 to help expand your business. In exchange, you offer me 10% ownership of ‘Jonathan Makes Money.’ This means I now own a piece of your company.”
He looked thoughtful. “So you would own part of my business because you gave me money to help it grow?”
“Yes,” I confirmed. “And because I’m now a part-owner, I share in both the successes and failures of the business. If your company becomes more valuable, the value of my 10% increases. If it loses value, my share decreases.”
I continued, “Suppose your business does really well after the expansion and is now worth $500. My 10% ownership is now worth $50. That means the $10 I gave you has grown into $50. If I decide to sell my share back to you or to someone else, I make a profit of $40.”
Jonathan’s face lit up. “So by investing in my company, you can make money if it grows!”
“That’s right,” I said. “And that’s essentially how stocks work. A stock represents a small piece of ownership in a company. People buy stocks to invest in companies they believe will grow in value.”
Making the Abstract Concrete
To reinforce the lesson, I drew a simple pie chart on the notepad, shading in a slice to represent my 10% ownership. “See, this whole circle is your company. This shaded part is the portion I own after investing.”
He traced the circle with his finger. “So if more people invest, do they all get slices of the pie?”
“Yes,” I replied. “Companies can offer shares to many investors. The total ownership is divided among all the shareholders based on how much they’ve invested.”
Jonathan was quick to connect the dots. “But if I give away too many slices, won’t I end up owning less of my own company?”
“That’s an important observation,” I said. “When a company offers shares, the original owners do give up some control. That’s why it’s important to balance the need for investment with the desire to maintain ownership.”
Diving Deeper: Stocks in the Bigger Picture
I realized Jonathan was absorbing the information well, so I decided to expand the lesson slightly. “In the real world, when big companies need a lot of money to grow, they sell shares to the public on something called a stock exchange. People from all over can buy these shares, becoming partial owners.”
He tilted his head. “Like a big market where people buy and sell pieces of companies?”
“Exactly! It’s called the stock market. Companies list their stocks on exchanges like the New York Stock Exchange or NASDAQ. Investors buy shares hoping that the companies will do well, so their shares become more valuable.”
“Do companies ever pay the investors without selling the shares?” he asked.
“Great question,” I said, impressed. “Yes, some companies pay their shareholders a portion of their profits, called dividends. It’s a way of sharing the company’s success without the investors having to sell their shares.”
Expanding the Lesson for Older Kids and Further Understanding
Had Jonathan been older, I might have delved deeper into the complexities of the stock market. For parents looking to expand on this lesson with their own children, here are some additional concepts that can enrich their understanding.
The Mechanics of the Stock Market
The stock market is a fascinating ecosystem where stocks are bought and sold. It’s influenced by various factors, including the company’s performance, investor sentiment, and global events. Explaining how supply and demand affect stock prices can help children understand why the value of stocks fluctuates.
The Role of Investors
Investors play a crucial role in the growth of companies. By providing capital, they enable businesses to expand operations, develop new products, and enter new markets. In return, investors hope to earn a profit through increased stock value or dividends.
Risk and Reward
Investing in stocks involves risk. The value of stocks can go down as well as up. Teaching children about the potential for loss is just as important as explaining the opportunity for gain. Discussing historical examples of market downturns and recoveries can provide perspective.
Diversification
One way investors manage risk is by diversifying their portfolios—spreading investments across different companies, industries, or asset types. This means that if one investment doesn’t perform well, others may offset the losses.
The Impact of External Factors
Global events, economic indicators, and political developments can all impact the stock market. Older children can explore how news stories or changes in government policies might affect investor confidence and stock prices.
Long-Term vs. Short-Term Investing
Investors may have different strategies. Some focus on long-term growth, holding onto stocks for years, while others engage in short-term trading. Discussing the benefits of patience and the power of compound interest can highlight the advantages of long-term investing.
Research and Analysis
Before investing, it’s important to research companies thoroughly. Understanding a company’s financial health, leadership, competitive position, and future prospects helps investors make informed decisions.
Practical Activities to Reinforce Learning
To solidify these concepts, engaging in practical activities can be highly effective.
Virtual Stock Market Games
There are numerous online platforms that simulate stock trading using virtual money. Participating in these games allows children to experience buying and selling stocks without real financial risk.
Tracking Real Stocks
Choose a few real companies that your child is interested in—perhaps those that make their favorite products or services. Track the stock prices over time and discuss the changes and possible reasons behind them.
Starting a Small Investment
For older children, opening a custodial investment account with a small amount of money can provide hands-on experience. They can choose stocks to invest in and monitor their portfolio’s performance.
Reflections on the Learning Experience
By the end of our conversation, Jonathan had a basic understanding of what stocks are and how they function as part of a company’s growth strategy.
More importantly, he saw how the concept applied directly to his own experiences with “Jonathan Makes Money.”
“Do you think I should sell shares of my company to grow faster?” he asked, ever the budding businessman.
“That’s something to consider carefully,” I replied. “Remember, bringing in investors can help you expand, but it also means sharing ownership and decision-making. You’ll need to decide what’s most important for your business.”
He smiled thoughtfully. “Maybe for now, I’ll keep saving my earnings and think about investors when I’m ready to make a big move.”
Teach Your Children About Investing
Teaching children about stocks doesn’t have to be a daunting task. By relating complex financial concepts to their own experiences and interests, we can make the learning process engaging and meaningful. Jonathan’s journey through entrepreneurship provided the perfect backdrop for introducing the world of stocks and investing.
For parents wondering how to teach a kid what stocks are, start by connecting the dots between their everyday life and the broader economic principles. Use examples they can relate to, encourage questions, and foster an environment where financial education is a natural part of conversation.
As Jonathan continues to explore his business ventures, I look forward to many more discussions about finance, investing, and the exciting possibilities they hold. Who knows? Perhaps this early introduction will spark a lifelong interest that could one day make him the next successful entrepreneur or investor.
Through this experience, I’ve learned that even the most complex topics can be broken down into understandable lessons for young minds. It’s not just about teaching them what stocks are; it’s about empowering them with knowledge that will serve them throughout their lives.
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