Investing and Kids: What Do Stock Simulations Teach Kids About the Stock Market?
Teaching children about the stock market is an effective way to put mathematics, logic, analytical, and reasoning skills to use in a real-world application. And it is a lot of fun to watch your investments grow. Investing is an important real-life skill for any person who is or wants to become financially successful. However, this skill is traditionally not taught in schools in the United States. You may be surprised to learn that educators and parents are enrolling children as young as 8 or 9 years old in extracurricular investment clubs and participating in stock simulator competitions.
Unfortunately, many kids who participate in these programs are unprepared for these competitions at a young age because they lack a foundation in other basic areas of financial literacy, so they come away with the idea that investing in the stock market is little more than gambling using complicated graphs and charts.
This article introduces some important concepts about the stock market that you will want kids involved in investment clubs to know.
How Does a Stock Competition Usually Work?
Stock competitions usually involve individual students or teams of students who buy stocks with an imaginary pool of money. My daughter participated in a team-competition. Her team invested $100,000 imaginary U.S. dollars in individual stocks, and competed against other elementary, middle school, and even high school students. The return of the stocks in her team's portfolio was the deciding factor in the team's placement in the stock competition.
My daughter's teacher required that teams research information about the stock and its performance before they purchased shares.
Advantages of Participating in Stock Competitions
I feel that there are some significant advantages to participating in a stock market competition. Here are some:
- Simulating investment decisions without spending money.
- Learning to read and analyze charts and graphs.
- Using math skills to calculate returns.
- Working with REALLY big numbers.
- Learning stock market lingo.
- Learning how to read stock information.
- Developing computer search skills for finding up-to-the-minute stock data.
Investment Club Vocabulary
Stocks— A type of investment that gives the investor a unit of ownership in a company.
Equities—Another name for stocks.
Portfolio—The collection of stocks you own.
Shares—Units of investment in a company, such as stock shares.
Share Price—What it costs to buy one share of stock in a particular company.
P/E Ratios—Price to Earnings ratio. The ratio of a company's price to its earnings. This number is an important quick measure of a company's value and productivity. P/E ratios vary by the industry a company belongs in. For example, the P/E ratio of silicon chip makers, such as Intel is higher than the P/E ratio of banks such as Wells Fargo, as a general rule, because silicon chips require expensive fabrication plants and extensive investments in research and development.
Return—The amount of money made on an investment, either through growth in the company's stock price, or income created by the company's earnings.
Stock Exchange—Place where shares of a company's stock are bought and sold.
What Vital Information Do These Competitions Leave Out?
Stock market competitions can leave out some significant concepts that are key to learning to invest. More well-informed stock market investors could probably add many more to the following list. As I see it, stock market competitions can run the risk of teaching superficial, rudimentary information about how the stock market works without addressing some of these broader ideas:
- The difference between trading and investing For small investors, trading, or day trading is akin to legalized gambling. Trading is the practice of making money from the ups and downs of the market. Timing the market is a key idea in day trading, and most investment professionals try to steer small investors away from this practice in real life because it is so risky and potentially damaging. Yet trading is essientally what a stock market competition does. Long-term investments are not rewarded. Instead, the riskier day trades make the most money.
- Risk vs. return If students participate in a competition for only a semester or two, the concept of risk vs. return may not be examined. Riskier stocks can potentially make more money than conservative stocks, but they can also lose more money much faster. By introducing analysis into the stock competition and asking "why is my portfolio performing this way?" a teacher might address this in a classroom setting.
- Not all companies are the same Different companies make money in different ways. And how they fit into a country, region, or world economy can also affect its performance. Not only that, some companies are very small by comparison to gigantic companies. Compare Sarah Lee to Unilever, for example. Both are food companies. One is a megalithic conglomerate with a diverse product offering, the other is a smaller company with a streamlined product line.
- Business performance is affected by the economy An otherwise sound company may be seriously hindered by its position within a certain sector of the economy. There are still some decent banks out there, but almost all bank stocks are suffering in a recession economy. Factors such as inflation and consumer behavior also play a role in company performance. By reading the news and combining a social studies element to the stock market competition, teachers could make a study in economics and business relevant to students.
- The magical power of compounding. One successful strategy of conservative investors is to buy income-producing stocks and reinvest the earnings into more shares of the same stock. Dividend Reinvestment Programs can do this for small investors while helping them to avoid paying high fees to investment brokers. This concept is probably not going to be covered in a stock market competition, since the duration of the competition is usually only one or two business quarters.
- There are other types of investments Stocks are only one type of investment. Bonds, cds, mutual funds, T-Bills, real estate, and other type of investments are usually not addressed.
Many of the above topics are advanced and not understood even by the average adult. But children who learn to see the stock market as an arena for day-trading may be set up for making some potentially unwise decisions later on. Let's make sure to do more than teach children day-trading techniques if we enroll them in stock competitions.
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