Stock trading has become much easier for young traders in recent years, thanks to fintech apps like Robinhood and Greenlight.
Robinhood, for example, has attracted unprecedented levels of young, entry-level traders to the stock market during the pandemic.
The rise of these trading platforms that let kids buy stocks can be seen as “a great opportunity” to get them “curious and excited about personal finances,” said Thomas Henske, a certified financial planner.
As markets continue to become more accessible to everyone, what can children gain by learning to invest and trade? CNBC Make It finds out.
Start learning young
Still, industry experts who spoke to CNBC Make It said it would be beneficial for kids 8 and older to have exposure to the stock market.
“Teaching the basics of investing allows your children to understand how businesses work, [how to] making money grow and hopefully…how to make smart investment decisions,” said Tania Brown, Certified Financial Planner and Financial Coach at SaverLife.
Kids also have a “valuable asset” adults don’t – and now is the time, added Jerremy Newsome, CEO of Real Life Trading, which teaches kids, parents and adults about the stock market.
“Kids, and even adults, learn about stocks and invest far too late. I’ve heard so many people tell me they wish they had learned when they were younger,” he said.
Understanding “Risk and Reward”
The ups and downs of the stock market can be daunting even for adults, and even more so for children. But Henske and Newsome say volatility is precisely why kids should start investing at an early age.
“You could say that there are several non-monetary benefits in the life lessons that stock market volatility brings,” Henske explained.
“Stocks can be a metaphor for life in many ways. Life is not a straight line. [Children can] educate yourself on the risk and reward…and think long term.”
For Newsome, learning about trading and investing is also a way to expose kids to “reasonable adversity” and build “introspection.”
“When you make a transaction – it doesn’t matter if it’s real money or fake money – and you lose, there’s a certain feeling that happens. You’re upset, angry, bored or frustrated” , Newsome said.
This gives children the chance to learn to recognize and understand emotions and then “shift” into a more positive state, developing “emotional intelligence”.
Newsome added that learning to trade stocks is also a way for your children to better “practice the math” and see it incorporated into real life.
“When kids go to school, they don’t know how the math they’re learning is going to help…or benefit [them].”
“In the stock market, you don’t have to be a math expert, but you usually have a good understanding of percentages, decimals, multiplication, addition, subtraction – those really fundamental math principles are very prevalent in trading,” Newsome said.
Investing for the future
Teaching children to save part of their allowance is one way to ensure that they will be financially savvy in the future. But experts who spoke to CNBC Make It said learning how to “build wealth” through investments is just as important at a young age.
“The earlier a person understands how to invest, the more likely they are to invest in the future,” Brown said.
Henske agreed, saying there’s “power” in starting early and it’s important to keep “the end in mind” – for some, that could be retirement.
He stressed that investing is important for those trying to reach their retirement goals.
“Show me someone who is an amazing saver and only gets 5% of that savings, and I’ll show you someone who has a better financial background… [and] gets 10% on their money.”
Learn to save first
However, Brown stressed that children should first understand the basics of finance before learning how to invest.
“Start by…saving some of their allowance and learning to delay gratification. These skills need to be taught, practiced and used before moving on to investments,” she said.
Henske agreed, saying kids should have personal finance topics “nailed in,” such as understanding the value of money, budgeting, saving and compound interest.
That’s why he thinks it’s more “productive” to start talking to kids about investing only when they’re in their “tweens” – between ages 8 and 12.
“When the topic of investing comes up, parents often get excited and want to jump straight into teaching kids to buy stocks. In my opinion, this is not the right place to start,” a- he added.
“What good is teaching them how to be a master investor if they can’t even save money? Last time I checked, a 20% rate of return on $0 equals $0.”
Henske’s advice to parents is to expose kids early about investing, but “don’t be discouraged if they don’t start to be receptive to these lessons before they hit high school.”
How should kids start investing?
Allow your child to choose a business that interests them, so they’re more of a “willing learner,” said Brown, who added that her own daughter chose Walt Disney.
Newsome suggests “investing in what you know”. These can be companies that offer goods and services that you use every day, such as Apple, Netflix or Google.
“Don’t worry about investing in a new startup you’ve never heard of before,” he said.
Brown added: “You can buy stocks directly from the company and buy low value stocks and then explain to your child how to value the stock. Remember that the goal is not a great return on investing, but more about teaching your child the basics of investing.”