Stock Market Basics For Kids And Parents
We review the stock market basics to help beginners as well as help you teach Your kids how to start investing
Investing in the stock market can seem intimidating, but it doesn't have to be.
It may seem like a daunting task at times, but with the right principles and strategies in place, it becomes a realistic and achievable objective. The key is to approach it with a long-term perspective, patience, and discipline.
We will look at the following topics in this 5 minute read:
What is the stock market?
What are the main global stock markets?
What are the ways you can Invest?
How to get started with your kids
Ok, Let’s get to it!
What Is The Stock Market?
The stock market was created to give companies a place to go to raise money for things they need.
For example, if I am a company that makes shoes for kids and I want to build a factory to make more shoes, I need money to buy the land, buildings, and pay people to do it. One of my options is to issue “shares” in my company to people who will give me money for them allowing me to build my factory. I am assigned a “ticker” which is used to list my shares on a “stock exchange”.
These shares are then sold by me through the stock market to anyone who wants to own a piece of my company. Think about a share like a small slice of pizza pie. You don’t own the whole pie, but you own some of it, and when all the shares or pieces of pie are added together, vola, you have all the owners of a company or pizza.
Now once the company sells their shares or gives out pizza slices, you are free to sell it or “trade” those with your friends, family or whoever else may want a share (or pizza slice). That exchanging of ownership shares by people is call the “stock market.”
Now on the stock market there are lots and lots of companies listed (think lots and lots of different kinds of pizza!) and lots and lots of people who make trades every single day. The way it is done today is mainly through computers but believe it or not, it used to be a bunch of people just shouting at each other when they wanted to buy or sell.
You can practice with your kids by using the quick fill in the blank below.
Stock, Equity, Stock Market, Equity Market, Ticker,
A ______ or _____ are both used to indicate ownership in a business.
People buy and sell stock everyday on the ________
________ is another term for the stock market.
Each stock typically has a three or four letter symbol that helps people identify it on a stock exchange. This is called a _______.
What Are The MAIN Global sTOCK mARKETS?
One of the first things to understand is that there are many stock markets around the world, each with their own set of companies and regulations. Here are some of the most commonly traded stock markets:
New York Stock Exchange (NYSE): The NYSE is located in New York City, USA, and is one of the largest stock exchanges in the world. It lists around 2,800 companies, including big names like Apple, Coca-Cola, and Amazon.
Nasdaq: Also based in the United States, Nasdaq is home to around 3,300 companies, including technology giants like Microsoft, Facebook, and Google's parent company, Alphabet.
Tokyo Stock Exchange (TSE): The TSE is the largest stock exchange in Asia and the third largest in the world, with around 2,500 listed companies. It's based in Tokyo, Japan, and includes companies like Toyota, Mitsubishi, and Sony.
Shanghai Stock Exchange (SSE): The SSE is one of the two stock exchanges in China, and it lists around 1,500 companies. Some of the big names on the SSE include China Petroleum & Chemical Corp. (Sinopec), China Mobile, and Industrial and Commercial Bank of China.
Hong Kong Stock Exchange (HKEX): Based in Hong Kong, the HKEX lists around 2,000 companies, including Alibaba, Tencent, and HSBC.
These are just a few examples of the many stock markets around the world. Now, let's take a look at some of the most commonly used stock indices and what they represent.
S&P 500: The S&P 500 is a stock market index that measures the performance of 500 large companies listed on the NYSE or Nasdaq. Some of the companies included in this index are Apple, Microsoft, and Amazon.
Dow Jones Industrial Average (DJIA): The DJIA is another index that measures the performance of 30 large companies listed on the NYSE. Some of the companies in this index are Coca-Cola, Nike, and Goldman Sachs.
Nasdaq Composite: The Nasdaq Composite index includes all the companies listed on the Nasdaq stock exchange, both big and small. It includes companies like Facebook, Amazon, and Tesla.
Nikkei 225: The Nikkei 225 is Japan's stock market index, and it includes the 225 largest companies listed on the TSE. Some of the companies in this index are Toyota, Sony, and Panasonic.
Hang Seng Index: The Hang Seng Index is Hong Kong's stock market index, and it includes the 50 largest companies listed on the HKEX. Some of the companies in this index are Tencent, AIA Group, and China Mobile.
These stock indices are important tools for investors to understand how the overall stock market is performing. They're calculated using a formula that takes into account the stock prices of the companies included in the index. By keeping an eye on these indices, investors can get a sense of whether the stock market is trending up or down.
wHAT aRE tHE wAYS yOU cAN iNVEST
Now that we know a little about the stock market, its time to talk about what different types of investments you can make. The focus of this book is on preparing you to invest in individual companies or stocks, but it is worth at least talking about other investments that are possible.
Three main other investments we will talk about are index funds, mutual funds, and Exchange Traded Funds (or ETFs). Don’t let these fancy terms scare you, they are meant to sound complicated but at the heart of them they are mostly just ways to invest in many companies at once.
Index funds or ETFs are types of funds that someone can invest in to track a bunch of stocks. Lets say for example you want to invest in all the baseball players on the New York Yankees. You could buy each of their individual baseball cards but you could also buy one card called “New York Yankees” and you wouldn’t have to have a card for each player.
This is how index funds or ETFs work. Typically when you buy the index fund you are buying something that represents a lot of companies at once. You don’t have anyone tinkering with your investments (this is called passive investing) and you just own all the players on the New York Yankees or all of the companies in the index fund or ETF.
Mutual funds can be similar but can also can have someone actively changing the players on the New York Yankees based on if he or she thinks they are doing better or worse (this is called active investing). Active investing can be good if you have someone who is picking the right players or companies but you sometimes may have to pay the person who runs the mutual fund more for doing so.
As noted, the above terms and ways of investing are important to know and learn, but we are aiming to teach you in this book how to be an investor yourself in individual stocks (so you don’t need those fancy terms).
How To Get Started With Your Kids
We all want the best for our children, and one way to set them up for financial success is by introducing them to the world of investing. Teaching kids about the stock market at an early age can be a fun and educational experience that lays the foundation for their future financial well-being. Here are some friendly tips to get your kids started on their investing journey:
Educate and Empower:
Before diving into the stock market, take the time to educate your kids about basic financial concepts. Explain the importance of saving, budgeting, and the benefits of long-term investing. Teach them about the risks and rewards associated with investing, so they can make informed decisions.
Start with Simulated Trading:
Begin by introducing your kids to simulated trading platforms. These platforms provide a virtual environment where kids can practice investing with fake money. They can experiment with different investment strategies and learn how the stock market works without any real financial risk.
Utilize Stock Market Games:
Stock market games are another fantastic way to make investing interactive and enjoyable for kids. Numerous online games allow children to create virtual portfolios, make investment decisions, and compete with friends or other players. These games provide a practical understanding of investing principles while keeping it engaging and fun.
Open a Custodial Account:
Once you are comfortable about putting real money behind their learning, consider opening a custodial brokerage account for your child. This type of account allows parents to manage investments on behalf of their children until they reach the age of majority. It's a great way to introduce your kids to the actual stock market, and they can witness firsthand how their investments perform over time.
Choose Kid-Friendly Stocks:
When selecting stocks for your child's portfolio, opt for companies they can relate to and understand. Think about the products or services they use daily or are interested in. Disney, Apple, Nike, or even their favorite toy company can be excellent choices to spark their interest in investing.
Invest in ETFs or Index Funds:
Exchange-Traded Funds (ETFs) and index funds can be a great option for kids. These funds allow children to own a diversified portfolio of stocks, reducing the risk associated with investing in individual companies. Look for ETFs that track popular indexes like the S&P 500 or Nasdaq, providing exposure to a wide range of companies.
Encourage Regular Investing:
Teach your kids the power of consistent investing. Help them set aside a small portion of their savings regularly to invest in the stock market. It's the habit of investing consistently over time that can lead to significant long-term growth.
Remember, the primary goal is to instill a lifelong interest in investing and financial literacy. Be patient, encourage questions, and celebrate small victories. By introducing your children to investing early on, you're equipping them with valuable skills that will benefit them throughout their lives. For more resources check out the following:
Happy investing, and here's to your children's financial success!
Final Thoughts…
However you decide to teach your kids about investing, just getting started is half the battle. Even if you don’t feel like you know enough or want to learn yourself, you can use this as an opportunity to learn together. As always, we are here to help so don’t hesitate to ask us any questions along the way!
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