The advent of trading systems that allow children to buy stocks might be seen as a wonderful chance to get them interested and enthused about personal finance.
The proliferation of investment apps like Robinhood, eToro and Greenlight has democratized investment and made trading stocks easier for young people in recent years. During the pandemic, for example, Robinhood attracted an unprecedented number of young, first-time traders to the stock market.
However, it may also present an opportunity for kids to acquire crucial life skills that will set them apart years down the road. So, as markets become more accessible to the general public, what might youngsters benefit from learning to invest and trade? Let us investigate.
Just like life, starting early is always a huge plus. Children also have a valuable asset that adults do not — time. It affords them the opportunity to make mistakes, learn from them and get ahead of their peers. It also sets the ground for achieving higher things.
Famed investor Warren Buffett got his head start in investing by starting early. The Oracle of Omaha is usually used as a reference point to the benefits of early investing. The earlier a person understands how to invest, the better chance of that person securing a financially stable future.
Teaching the basics of investment exposes your kids to understanding how businesses work, how to read financial statements, how to grow and manage money, and prepares them for making wise investing decisions.
Stocks can be a metaphor for life in several respects. For every action there is a consequence. For every risk there is a reward. The ups and downs of the stock market can be intimidating even for adults, how much more so for kids.
However, this could also prove to be an important learning point for kids on how to weigh risks and calculate rewards. The risk-reward ratio teaches kids how to assess the potential rewards that come with an investment risk.
In life, they can also judge the value of their actions and its consequences using the risk-reward ratio.
Children can also learn the value of long-term thinking when they engage in the stock market. Investing is usually favored over trading because you accrue larger gains over time, less trading costs, plus you are less susceptible to the swings in the market.
By following a long term investing strategy, kids can internalize the benefits of thinking long term in their own lives. This would enable them to choose their associations, plan their actions and not get distracted by the trends in society.
This is because they know that the benefits in the long term outweigh short-term gains.
In a world that is overdosed on instant gratification, putting off present gains for future benefits can be challenging. However, if your kids start investing in the stock market early, they get to appreciate the benefits that come from delayed gratification.
Monies which would have gone into other things such as buying new games, gadgets or clothes would be set aside for investing. By forgoing these new items, and seeing his/her portfolio grow over time, your kids begin to appreciate delayed gratification.
Better still at an early age - a lesson most people are not able to grasp in their lifetime.
Warren Buffett is credited with enunciating an investing principle called circle of competence when looking for stocks to invest in. This same viewpoint was echoed by Peter Lynch who stated that retail investors should only invest in companies they know.
By investing in a company you know, or operating within the area of your circle of competency, there are fewer errors for margins and huge potential for portfolio gains.
Similarly in life, we all need to find our strength and optimize it. By sticking to what you know, you can only get better and carve a niche for yourself. This does not imply you should not try new things. Rather, identify new things you should try, and you would have a base, then diversify.
The ability to master your emotions is the hallmark of a great personality. The stock market is notorious for pushing human emotion to the limit. Most investors who got burnt were susceptible to the emotional swings in the market, choosing to follow the herd instead of sticking with their trading strategy.
Successful investing is 80% emotion, and 20% strategy. The stock market is a good place for your kids to learn to control emotions such as greed and fear and take calculated decisions and not lose their heads when everyone around them is losing theirs.
They will understand that knee-jerk reactions to situations are setting you up for a disaster down the road.
It is said consistency beats talent, luck, motivation and quality. The ability to keep investing over years turns investing into a habit. Consistent people are extremely rare. If you can learn to cultivate consistency in your chosen endeavor you'll eventually beat all odds.
Your kids can unwrap the magic of consistency through regular investments over the years. They would be able to develop their will power by sticking to an investment goal. For example, you can get them to start saving for college or their own home from a young age.
The key point is not saving for a goal, but developing the mental resilience to stick to a goal even when things are not going your way. This trait will help them in other aspects of life where they would be tested and pushed to the limit.
One of the benefits of teaching kids to invest early is the power of compound interest. Through compound interest they can grow a meager portfolio contribution to large pools of cash. While the benefits of compound interest on investment are obvious, very few people are actually aware of how it also affects our lives.
It is said our life is a sum total of all our choices. This implies your present state is an accumulation of your past choices. These choices do not only have direct consequences, but also have secondary effects in our life.
To put it more clearly, an action can have a consequence which would also lead to another consequence. In other words, the consequences (interests of your actions) are compounding.
Investing in the stock market and understanding the principle of compound interest can teach kids understanding not only the primary consequence, but also the secondary consequence of their action.
For example, investing in the stock market while securing a bright future for them, also means they would live a debt free life. This in turn allows them to set their kids up for a brighter future. Like a pebble thrown into the pond, they would be able to decipher the ripple effects of their actions.
Allow your child to pick a company of interest, so that he or she will be more of a “willing learner". These can be companies with goods and services you use every day such as Apple, Netflix or Google.
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.
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.
June 30, 2022