How To Teach Kids To Invest

When your children leave home to start their lives as young adults, do you expect them to have the financial knowledge to manage their affairs properly? Unfortunately, there are no training wheels to help young people learn to invest or handle money. As their parent, it's up to you to start preparing them for the future so that they can go on to live financially enriched lives.

Twenty years ago, when we first launched TeenVestor.com, we found that there are five main reasons why parents shy away from encouraging their children to invest early:

• Parents themselves don't know much about investing

• Parents worry that their children won't understand complicated investing concepts

• Parents fear their children might put too much emphasis on money

• Parents think that teaching their children about investing will interfere with their basic education (the three R's)

• Parents think investing skills will come naturally with maturity.

In this article, we'll explain why you should teach your kids to invest in the stock market and what you need to know in order to encourage them to become investors. We encourage you not to put off your children’s financial learning any longer than necessary. Teaching them to invest early will prepare them for an easier and more stable financial future.

How Perspectives Have Changed About Teaching Kids About Money & Investing

Although most parents lack a comprehensive understanding of investing, their attitudes about whether their children should learn to invest have dramatically changed. Many of them finally understand that ‘reading, ‘riting, and ‘rithmetic are not enough to guarantee that their children lead productive lives.

 They now know that learning to save and invest are skills they’ll have to teach their kids.

 Indeed, more states are requiring high school students to take personal finance classes before graduating. Currently, seven states have such a requirement: Alabama, Mississippi, Missouri, North Carolina, Tennessee, Utah, and Virginia. In addition, the Pew Charitable Trust said this about the laws recently passed about financial literacy in schools: “In the past couple of years, Nebraska, Ohio, Rhode Island and, most recently, Florida, have passed laws making financial literacy a must in high schools in the next year or two. In North Carolina, graduation requirements take effect in 2023.” (Pew)

 According to findings from a NextGen Personal Finance Report, only 16.4% of graduating high school students completed a standalone personal finance course in 2018. However, in 2022, that number has risen to 22.7%.

 Yet, taking a personal finance class is not the same as learning how to invest in the stock market—the single most important and potentially profitable investment option for average Americans outside of home ownership. Stock ownership is so pervasive in the US that according to the Gallup organization, about 58% of Americans own stocks in 2022 as shown in the chart below.

Overall, attitudes have shifted about whether kids should learn to manage money and participate in the stock market. Financial institutions have also recognized this phenomenon and have moved to offer services and innovative products to help kids become financially responsible. You need to look no further than the new apps that have popped up over the past few years that allow kids and teens to invest in the stock market. For example, Greenlight Financial Technology Inc. has been in the forefront of the move to raise the financial literacy of kids and teens, including providing a platform through which they can invest in the stock market.

But how does a parent know their kids are ready to learn about investing? We tackle this in the next section.

Should Kids Invest in the Stock Market?

Some kids may not be ready to leap into stock investing. We recommend waiting until they are in their teen years before introducing them to investing. This way, they will be mature enough to truly appreciate the potential risks and rewards of investing in the stock market. How would you know if your kids are ready to become stock investors? It depends on the lessons they have already learned up to this point. Have they shown any skills in handling money, no matter how small the amount is at their disposal?

Parents who can afford to do so can help their teens manage money by giving them a regular allowance, no matter how small their budget. I emphasize providing allowance on a fixed schedule to help them plan for long-term expenses and things they may want to buy.

By providing allowance on a fixed schedule, you help them think about the future and refrain from immediately craving gratification. Your kids can’t plan for future expenditures if they are unsure when they will receive their allowance.

You may also want to consider tying allowance to chores around the house. I discourage parents from paying for tasks their kids should be doing anyway, such as cleaning up their room or the bathroom they use. These chores should be tasks above and beyond what you would typically expect of your teen.

Overall, basic money management skills, including the ability to save (through a bank account), are precursors to your kids beginning their investing journey.

Click on the image to determine if your kids are ready to invest in the stock market.

Encouraging your children to invest in the stock market will take a little more effort than just cheering them on from the sidelines. Some kids need incentives before they fully buy into investing in stocks. The incentives could take the form of agreeing to partially match any money they decide to invest in stocks or even to encourage relatives (such as parents) to give any cash gifts in stocks. Another way is to allocate a certain amount of their allowance money (if you can afford to provide allowance) for investing in stocks. You can probably devise some other creative ways to incentivize them to invest. But once they begin on the road to responsible investing, they'll be hooked on the prospect of building a long-term portfolio of stocks.

 Some teens will be motivated to invest in stocks just by the prospect of learning how to secure a solid financial future. Making quick money in the market is not the primary motivation for these teens. 

 TeenVestor.com surveyed 160 teens (ages 13-18) who took our online 10-hour investment course, the TeenVestor Stock Certification Course. One of the questions ask in the survey was: “What are you hoping to get out of the course.”

The survey showed that only 17% of the teen learners were explicitly motivated by making money in stocks, and 5% were interested in learning how to actively trade stocks (presumably to make quick money). The remaining 78% of students were more interested in acquiring investing knowledge, building long-term investment habits, and avoiding risk, presumably to build a solid financial future. The pie chart shows the results of the surveys.

Question To Teens: “What Are You Hoping to Get Out of this Course?”

Therefore, you can try both tactics. Provide some financial incentives to encourage them to invest if you can afford to do so and push the angle of their long-term financial future being enhanced if they learn how to invest at a young age. The personality of your kids will dictate which of these two tactics will resonate with them.

Custodial Investment Accounts for Your Kid Investors

How old do your kids have to be to invest in stocks on their own? Eighteen years old or more. Under 18, they cannot outright own stocks, mutual funds, and other financial assets. As minors (i.e., people under 18), they can make investments only under your supervision or under the control of other adults through custodial accounts. You would have to sign them up for the custodial accounts that online brokers offer.

Without boring you with unnecessary details, all you have to know is that two types of custodial accounts are used for establishing investment accounts for anyone considered a minor.

1. One account is established under the Uniform Gift to Minors Act (UGMA); and

2. The other account is established under the Uniform Transfer to Minors Act (UTMA).

Either of these accounts would allow you to contribute money your kids can use to buy stocks or other assets under your supervision. Which type you open will largely depend on the state in which you reside.

Your kids will own the assets in the custodial account, but you will control the investments in it (hopefully, with your help) until your children are no longer minors. Here are some things you should look for in custodial online trading accounts:

1. No stock trading fees – you should find online brokers charging $0 to buy and sell stocks.

2. Low-balance stock trading accounts – make sure the online broker does not require you to maintain a sizeable minimum balance in a trading account; many of them offer $0 minimum balance.

3. Brokers that allow for fractional shares – if you want to invest as little as $1 in reputable companies with high stock prices, you can only do so if the online broker allows you to buy fractions of a share of stock.

We recommend opening accounts with online brokers with apps that are specifically geared towards the teen/young adult demographic. Some examples include

• Fidelity Youth Account

• Greenlight

• Acorns Early

• Stockpile

• Bloom

The full list of online brokers appropriate for teen investors can be found here: Teen-Friendly Online Brokers.

Some of the companies on this list, such as Greenlight and Loved Investing, are relatively new and were established specifically to serve teen investors and their parents. They offer investing apps that make it easy to open investment accounts for teens and for these teens to invest in stocks with their parents’ approval.

One of the older companies on this list, Fidelity, started a new program a couple of years ago called the Fidelity Youth Account, which made a big splash in the press when it was launched. This program provided an easy way for kids to invest in stocks. However, parents need a regular Fidelity account to register their children for the account. The Fidelity Youth Account is not technically a custodial account because kids can control their investments on their own. It is still unclear to us how kids ages 13-17 (as stated on their website) can have total control of the accounts without involving their parents in investment decisions. 

You may notice that one very prominent online broker, Robinhood, is missing from this list. There is a good reason for this — the company did not offer custodial accounts at the time of the writing.

Available Resources to Speed Up Your Children’s Investment Education

You don’t have to be knowledgeable about investing to guide your teens to good online resources that will help them learn about stocks. To get them started, here are free resources we recommend: 

1. TeenVestor.com – This is the only website with a full array of educational material for teen investors and their parents. See press materials here about us.

2. Andrei Jikh (Youtube Channel) – This is a good resource that teaches basic investing and economic concepts for beginning investors.

3. TeenBusiness (Youtube Channel) – This is the only channel devoted to teaching teens how to become investors and entrepreneurs.

4. Investor.gov – This site is by the Securities and Exchange Commission (SEC), which regulates securities in the United States. The site provides investor education for teens covering stocks, ETFs, and other investments.

5. How the Market Works – This website, which also runs a stock market trading game, has an education section with some lessons about the stock market.

6. Wall Street Survivor – This website, which runs a stock market trading game, has an education section with some lessons about the stock market.

 The more exposure your kids get to financial information and investment knowledge, the better prepared they’ll be to invest in real stocks.

 Mock Portfolios

There are a few sites that will let your teen investor set up a mock stock portfolio and trade stocks with virtual dollars. With these sites, they can play with stocks without risking real money while learning how and why stock prices move up and down. The most important lessons young investors can learn from these mock trading portals is that investing in stocks is not a way to get rich quickly.

After your kids set up a dummy portfolio, the site will tally up the value of their stocks on a daily basis. The websites use real trading data from US stock exchanges to tabulate the value of the portfolios.

Our mock portfolio portal is MockPortfolios.com. Other popular mock trading platforms include Wall Street Survivor, How the Market Works, and MarketWatch Virtual Stock Exchange.

Stocks for Kids

Sometimes it's hard for young people to decide which stocks to choose before learning the fundamentals of stock analysis. We suggest not waiting until they have stock selection expertise before beginning their investing journey.

Thousands of stocks are listed on the major US stock exchanges. Researching each of these companies is an impossible task. 

 It is probably wiser for your kids to begin by looking at big companies such as those found in an index like the Dow Jones Industrial Average (the Dow) if they want to buy individual stocks. 

 Examples of companies in the Dow include The Coca-Cola Company, Apple Inc., The Walt Disney Company, Nike, Inc., The Home Depot, Inc., McDonald's Corp., Microsoft Corporation, and 23 other companies.

 If the stocks in the Dow don't interest your young investors, you may want to suggest that they consider investing in stocks of companies that teens like. 

 Piper Sandler does a survey each year of over 7,000 teens called  Taking Stock With Teens to discover what brands they like and use. These include brands of shoe companies, restaurants, snacks, clothing, and many other consumer items and services young people use.

 Basing stock purchases on brand recognition may not be the best way to decide what stocks to buy, but the companies in the survey will give your kids some initial investment ideas. Later, when they get more experienced in investing, they can do fundamental research to see which stocks are worth their money. Here is a list of some of the top brands that may be of interest to teen investors: 

• Top 3 Footwear Brands: Nike (Nike, Inc.), Converse (Nike, Inc.), Vans (VF Corporation)

• Top 3 Handbag Brands: Coach (Tapestry, Inc.), Michael Kors (Capri Holdings), Kate Spade (Tapestry, Inc.)

• Top 3 Restaurants: Chipotle (Chipotle Mexican Grill, Inc.), Starbucks (Starbucks Corporation), McDonald’s (McDonald's Corporation)

• Top 3 Snacks: Goldfish (Campbell Soup Company), Lays (PepsiCo, Inc.), Cheez-it (Kellogg Company)

• Top 3 Clothing Brands: Nike (Nike, Inc.), American Eagle (American Eagle Outfitters, Inc.), Lululemon (Lululemon Athletica Inc.)

• Top 3 Payment Apps: Apple Pay (Apple, Inc.), Cash App (Block, Inc.), PayPal (PayPal Holdings, Inc.)

Investing in big companies or big brands probably means that returns will likely be moderate at best. However, the advantage is that stock prices will not fluctuate as much. For example, the stocks of a brand like Apple or Nike is not going to swing as wildly as the stocks of a brand new tech startup.

Your Teen Investors Should Consider Exchange Traded Funds

An easy way to introduce teens to investing is through Exchange Traded Funds (ETFs). ETFs  are investments that represent a diversified group of companies (just like mutual funds) but trade like stocks. Some ETFs track broad stock market indexes such as the Dow Jones Industrial Average, the Standard and Poor’s 500, and the NASDAQ.

Investing in such ETFs is less risky than investing in individual stocks so they are probably more appropriate for beginning teen investors. Overall, investing in broad stock index ETF is a simple and low-cost way to invest in a group of stocks at the same time, thereby reducing investment risk. Here are the ETFs associated with the 3 major stock market indexes:

• The Dow ETF: SPDR Dow Jones Industrial Average ETF Trust - symbol: DIA

• The S&P 500: Vanguard S&P 500 ETF - symbol VOO

• The NASDAQ: Invesco QQQ - symbol: QQQ

Annual Reports and Stock Symbols

Two important elements your teens need before investigating any stock are

1) the company’s annual report and

2) the company’s stock symbol.

Annual Reports

Once your aspiring young investor decides on what stocks they may want to invest in, they should get the annual report of the company.  An annual report is a document used by most public companies to disclose corporate information to their stock holders every year. It is usually a state-of-the company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs.

Sometimes, companies may use something called a “10-K” as a substitute for their annual reports. The 10-K is a filing required by the US Securities and Exchange Commission of all public companies. It contains much of the same information that companies put into their annual reports. A company like Apple, for example, uses the 10-K as its annual report.

Annual reports are easy to find with a quick Google search. For example, typing “General Electric annual report” into the Google search bar, will probably show search results of the “investor relations” section of General Electric’s website which will lead you to the company’s latest annual report.

Here are some links to the annual reports of a few companies you may know: McDonald’s , Apple, and Coca-Cola.

Two very important tables in the annual report are the Balance Sheet and the Income Statement. Which we briefly describe below.

Balance Sheets for Teen Investors

One of the important items found in annual reports is a balance sheet. A balance sheet is a snapshot of what a company owns (or assets), what it owes (or liabilities), and the difference of the two amounts (also known as shareholder's equity, owner's equity, or just plain equity) at a specific point in time. Proper fundamental analysis of a company requires that an investor at least reviews its balance sheet to understand whether the company is able to pay its debts in order to keep functioning as an ongoing producer of goods and services.

Your teen investor should go here to get more information on how to use the balance sheet in determining what companies are worthy of their investment: Balance Sheets.

Income Statements for Teen Investors

Another important item found in annual reports is an income statement. An income statement shows the amount of money a company takes in by selling its products, the expenses of the company, and the profit (or loss) the company makes over a specific period of time. Proper fundamental analysis requires a review of a company’s income statement to see if the company is making money to support its operations and to return money to its investors (i.e. its stockholders). Please go here for a full explanation of income statements.

Your teen investor should go here to get more information on how to use the balance sheet in determining what companies are worthy of their investment: Income Statements.

Getting the Stock Symbol

To get the price of a company's stock or detailed financial information about a company, your young investor needs the stock symbol for the company. US Stock symbols are generally 2-3 characters long and don't always correspond to the company's name or the name of the product it makes. For example, in an earlier section, we mentioned Coach, a consumer brand that makes women's bags and accessories favored by some teens. If your young investor wanted to invest in Coach, they would first have to find out who owns the company by doing a Google search. If they search, they will discover that the maker of Coach bags is Tapestry, Inc. To get the stock symbol for Tapestry, Inc (and to get financial information on the company), your young investor should go to type "Tapestry" into the search bar of Yahoo!Finance. Doing so will show the stock symbol, TPR.

Final Thoughts

Teaching your kids to invest in stocks is one of the best things you can do to prepare them for a bright financial future. By enrolling them in the TeenVestor Stock Certification Course, you can introduce them to the topic and help them learn about investing. The more exposure they get to the investment world, the better prepared they’ll be to make substantial profits in the future.