Explaining the Stock Market to Kids

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A Parents/Kid's Guide to Investing

When it comes to explaining the stock market to your kids, it doesn't have to be a fearful or complicated endeavor. Sure, there are a lot of big terms and complex formulas that investors and brokers use in referring to the stock market.

Fact is, the stock market is rather easily explained...

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Invest Like Warren Buffet

Did you know that Warren Buffet, the "Oracle of Omaha" started investing at the tender young age of 11 years? If you want an example of someone who learned how to make the best of the stock market, Mr. Buffet is a prime example.

At a recent event where Mr. Buffet was speaking, he pointed out that a single share of the Coca-Cola® company - which sold for $40 when it was issued back in 1919 - were to have all dividends reinvested over time, today that single stock would be worth over $9.8 million (USD).

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How Do You Turn a $1000 Investment Into $25 Million?

Well, the simplest answer is that you invest it. One thousand dollars (USD) invested with Mr. Buffet in 1959 would be worth over $25 million (USD) today.

Many people make money in the stock market. People that stay in the stock market over longer periods of time make even more money. That's all you need to provide the motivation when explaining the stock market to kids.

Teenage Investor's Stock Portfiolio Worth More Than $50,000

Damon Williams, 14 years of age, may be a millionaire in the making through his stock market investing. He already has an investment portfolio worth over $50,000 (USD). Here's a young investor who learned the value of money, how to handle that monkey and invest it in the stock market.

His mom taught him what he knows and the rest he learned on his own. This teen investor knows how to research stocks and companies online to find out which companies will make the best investment. Damon knows the difference between dividend yields, P/E ratios and how a companies growth rate may affect its future stock value.

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Here is a good animated explanation of how stocks work...

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When Explaining the Stock Market to Kids, Start With the Basics:

Both investing stocks and how the stock market works can seem very complex to a young person who has no idea of such things. When I teach kids about complex subjects, I tell my students it's like eating an elephant - you have to do it one bite at a time. The same is true when it comes to explaining the stock market to kids.

Here is a simple, basic explanation of how stocks and the stock market function:

• The stock market is a place where people can buy and sell pieces of a company These are known as shares or stocks

• These stocks are pieces of paper that have a value, sort of like money

• A stock shows that you own a small piece of that company

• Companies can issue millions of these stocks to help them raise money to grow

• The value of each stock changes (up or down) over time depending on what people think about a company or how well that company performs

• Investors can buy as many of these stocks as they can afford

• When a company makes money and the value of the company goes up, the value of that stock goes up, too. When the value of the company goes down, so does its stock

• Companies that issue stocks have brokers who trade, buy and sell them at a stock exchange like the New York Stock Exchange (NYSE)

• The Dow Jones Industrial Average (DJIA) keeps track of the stock market, whether it is going up or down in value

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Explaining What Stocks Are

All companies need more money to grow and do more business. Sometimes, a company needs more many than it has in the bank to make the business bigger, hire more workers and make more things. To get the extra money needed to grow, companies offer tiny pieces of ownership in their company. Those tiny pieces or shares of a company are known as stocks. The value of a share or stock may go up or down depending upon many different factors.

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Explaining Why People Buy Stocks

Regular people can buy a piece or share of the company when they buy stocks in that company. These people want to buy the stock for a little money in hopes that the money from the stock will help the company grow bigger. When the company grows bigger, the value of that stock also grows and becomes worth more money.

For example, let's say you bought one share or stock in the Disney® company for one dollar. Then Disney comes out with a new movie that makes millions of dollars. That money from people buying stocks helped the company grow larger. When Disney grows larger, it becomes more valuable. Your one share or stock may now be worth two dollars.

People buy stocks hoping they will go up in values and make more money for them. Sometimes a share or stock will go down in value. When this happens, the people who bought the stock lose money.

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Explaining the Stock Market

Simply, the stock market is a place where a whole lot of people come together to buy and sell these stocks. This buying and selling of stocks is called trading.

There are millions of these trades made each day in the stock market, and there are many stock markets around the world. The largest stock market is the New York Stock Exchange.

Basic Stock Market Vocabulary Words for Kids

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Hey, there are a lot more terms to know if you explaining the stock market to kids, but these five basic terms will provide a good beginning. Check out the link below for a complete dictionary of investing terms and definitions.

• Stock price - The cost of purchasing a single stock or share of ownership in a company

• Stock value - This number determines the monetary value or price of the stock at any given point in time.

• P/E Ratio - The price of a stock divided by the earnings of that stock. Example, a stock that costs $20 and pays $2 per share has a P/E Ratio of 10. P/E ratios are one of the best ways to make an informed decision about a company's stock worthiness. Lower numbers are better. P/E ratios of around 15 are ideal.

• Earnings per share - Also known as EPS, is basically what's left of a stock after everything else is paid to keep the company going. To find the EPS, combine total assets of a company minus total liabilities. This number is used to help investors determine the company's profitability or potential of profitability.

• Dividends - These are simply how a company pays a portion of the money it earns over a certain period of time to shareholders. Better stocks typically pay higher dividends over a long period of time.

• Return on Equity - also known as an RoE. Equity is a share or stock in a company (Equity means ownership). The EPS is used to calculate the Return on Equity. RoE numbers that decrease may indicate a company is losing money. Companies that have a higher RoE are more likely to generate cash from within the company and less likely to borrow money. Higher RoE for a stock is better.

• Compound Annual Growth Rate - Also known as CAGR. Usually this number indicates the rate at which a stock grows each year compared to previous years. The CAGR is typically used to determine the compounding rate of return on an investment over a certain period of time. CAGR's usually appear in a company's financial statements.

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Why Should Kids Learn About Stocks and Investing?

In today's world, financial markets are a huge driving force that can have an effect on almost every aspect of life. Explaining the stock market to kids is essential if kids are to one day become money-smart adults. Kids need to know that without the stock market, there would be no innovation or new products like medicines that save lives, energy-saving technologies and better movies or video games.

Kids also need to learn that the stock market is an excellent place to help make their money grow. While more money is not the solution to all of life's problems, it sure gives people a few more options. Money also helps kids go to college, buy new houses and new cars. Helping kids understand the stock market teaches kids about the value and importance of handling money properly in order to make it grow.

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Comments 2 comments

VirginiaLynne profile image

VirginiaLynne 4 years ago from United States

Very interesting information. I have talked about stocks with my kids but generally in reference to history. I do think you might point out the potential to lose money also, and maybe the idea of diversifying your assets.


MKayo profile image

MKayo 4 years ago from Texas Author

Thanks, VirginiaLynne - I plan to address those issues in upcoming articles. Thanks for the read and compliment! Best, M

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