How to teach your kids about: The Stock Market
With the stock market popping up on the news due to the virus, I thought it would be a good time to write a blog to help parents teach their kids about ‘what is the stock market?’ using Lego and McDonalds. Before writing I spoke to my young daughters about this subject to see how it would go down. Turns out they like it as my eldest (aged 7) talked about it the next day with her classmates when doing her ‘show and tell’ lesson (which was via the internet due to the Cornavirus outbreak). Her classmates seemed genuinely interested and engaged as they asked some really good questions. I believe that this is an important topic as kids need to learn that you can save money to make money and investing in the stock market is one way to achieve that. In this blog I cover how I explained the stock market to my kids; what is the stock market, why people invest in the stock market and, a little bit about what is happening at the moment in the stock market due to the virus. Explaining the “Stock Market” to kids using McDonalds The first thing I did is try to make it feel real to them by talking about actual companies they have heard of. For my kids, I firstly used McDonalds. I explained that as we invest for them, they actually own a small piece of McDonalds. This means when we go to McDonalds and see people buying a burger, they actually get a very small percentage of that money (I don’t explain exactly how small that percentage is ). If we go to the Apple store I explained they get some of the money from people buying Apple products. If they go to Disneyland, they now understand they get some of the money people spend during their day of fun. The stock market is a place where you can go and buy a piece of a company. I explained how we actually invest in pretty much all the different companies that are available in the stock market rather than trying to pick just a few. Why do people invest in companies like McDonalds? I explained the money they have saved has been given to companies like McDonalds to help those companies grow. If those companies grow, so does their (my kids’) savings. Some of their savings go towards helping McDonalds come up with new types of burgers or opening new restaurants around the world. If McDonalds have new burgers or more restaurants then they hope that more people will buy more burgers and therefore McDonald’s will earn more money. As my kids own a bit of McDonalds, they realise the more money McDonalds makes then the more money their savings will grow by. I used the example of buying a piece of McDonalds for £10 (I used 10 as a random number). If McDonalds do manage to grow then in the future their £10 could be worth £20. That means savings would have doubled. That’s why people invest. What’s happening now in the stock market due to the Cornavirus outbreak? I then described how whilst you hope that McDonalds will always be worth £10 or more, there are times when it could be worth less than £10. For example, due to the virus everyone is staying at home. This means less people are eating out in McDonalds restaurants and therefore McDonalds may make less money than people thought they would make this year. As a result it could mean that McDonalds could have fallen from £10 to £5. It’s times like this that people get worried about investing in the stock market. However, …. …. [super important lesson coming up] …. …. people shouldn’t worry too much about what is happening right now. This is because whilst the stock market might fall due to certain events, if you wait long enough it always recovers. Once the virus has been controlled, people will go back to eating McDonalds as they can leave their homes. If they start eating McDonalds again, then it should go back from £5 to £10 and hopefully up to £20 in the future if they open more restaurants or create new burgers. Actually if you invest now (£5), you would get a piece of McDonalds for less money than others paid before the virus. This is great because if it goes to £20, you’ll get 4 times the amount from your savings. So when the value falls, it can actually be a good opportunity to start investing in the stock market! This is what my daughter explained to her class during her ’show and tell’. I have to admit I was a very proud parent. Companies going bust During the ‘show and tell’ she also said some companies can go bust! This led to one of her classmates asking ‘what do you mean going 'bust'?’ She managed to recall the example I gave her the night before. She spoke about how her parents used to go to a place called ‘Blockbuster’ which is like a library but you rented movies for a small amount of money. She had to explain that we would put the movie in a ‘special machine’ to watch it (I admit I felt really old at this point as they did not know what a video player was!). She explained that Blockbuster went bust as Netflix came along and people preferred to just click a button on the TV remote to get a movie rather than leave their sofa to go to this ‘library’. Not worrying if companies go bust I said imagine we invest in 10 companies and they are all worth one Lego brick
I then explained how if 2 of these companies go bust (like Blockbuster), it means that two of the Lego bricks disappear so you only have 8 bricks left which would be bad. However, if the other companies that remain do really well (like Netflix) then they might grow from being 1 brick to be 5 or higher bricks in the future. This means you’ll have a lot more than when you started.
This is why we invest in lots of different companies. We don’t know which ones will go bust or which ones will do really well, so we invest in most of them [the jargon term for this is ‘diversification of risk’]. There you have it - the basics of the stock market explained to a 7 year old! I hope the above has inspired you to talk to your kids about investing. There are clearly a lot more details but it’s more important that your kids see that money can grow and that they can ‘own’ a piece of the companies they like rather than just ‘spending’ their money there.
NEXT: How to teach your kids about: The Stock Market - Part 2 If you would like to consider helping your kids invest their savings then there are plenty of resources available on the Blue Tree Blog site:
Also I’d recommend the book ‘Unshakeable’ by Tony Robbins as a good introduction to parents who want to learn more about the basics of investing. If you (or your kids) have any questions then please feel free to contact me (Will) at firstname.lastname@example.org. No question is too stupid to ask as I’m sure others will probably be thinking the same even if too afraid to ask (remember - this is not taught in school)!
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Others in the series:
How to teach your kids about: Saving money to make money
How to teach your kids about: Saving money to spend later
How to teach your kids about: Saving money by spending less