7 Steps to Teach Your Children About the Stock Market

Before they can understand how to make money work for them, your kids need to see the value of saving. Even the youngest child can grasp the idea that if they save half their allowance for a few weeks, they can buy something special at the end of the month. Help them learn about delayed gratification; encourage saving on a regular basis.

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Kids learn from stories, so tell them that good financial moral. Talk about the time you saved money to buy your first car or the story of how you bought the house you now live in, with a simple explanation of how a mortgage works. Ask them why they want to save money. Now is a good time to start telling stories that can help to explain how the stock market works: When you buy a piece of a company, you get part of everything the company earns. Simple examples will drive the point home: if you give your child money to buy lemons and sugar for a lemonade stand, they will give you 25 cents for every cup of lemonade they sell.

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As soon as your kids can multiply and divide with confidence, they're ready to learn about compound interest. Show them how simple interest works so they can be amazed when they see the difference once it kicks in. Of course, it's also time to get them started with a savings account. Have them calculate how much money they're earning with it. Understanding how much money they earn just through savings plus compound interest is a prerequisite to the world of investing.

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Using video games and apps to simulate investing in the stock market makes the whole topic of investment approachable for kids. Stock market games are available as early as fourth grade. Let your kids make some investments just for play, and don't steer them away from bad ones; taking some big losses will help instill appropriate levels of caution. Turn your play investments into a fun competition, and track your investments together to see how you're doing.

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Now it's time to let your kids make some actual investments. Set up an online brokerage account for them (you'll have to be on the account, too). You can stake them to a small investment of, say, $50 to $100, or they can use their own money if they've been saving their allowance. Using real money will help them take their decisions seriously. Do they want to bet everything on one stock? Or do they want to spread out their investments so that if one stock goes down, they don't lose everything? As they make these decisions, they're learning the importance of diversification, which opens the door to explaining how mutual funds work, and how they can be a better choice than investing in individual stocks.

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Track how your kids' investments are doing on a regular basis. If they're investing in individual stocks, have them track mutual funds (preferably ones that contain those stocks) as well — and if they're investing in mutual funds, have them track individual stocks. Help them learn how to compare the performance of their stocks to the S&P 500 or other indexes. Consider having your kids form an investment club at school so they can do some of these activities with their friends.

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Try some of the books aimed specifically at tween and teen readers who are interested in the stock market, such as Kara McGuire's "Teen Money Manual." Older teens can start reading basic investment guides, and Karen Blumenthal's "Grande Expectations," which charts the ups and downs of Starbucks stock over a year, can help them get a real-world perspective on what it means to put your money into a single stock. By adding to their knowledge, your kids will be well-prepared to start investing on their own as soon as they're bringing home a paycheck.

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