Teaching Financial Literacy to Tweens: The Stock Market

If you went over the previous chapter, your child will have learned that lower interest rates earn much less money over time than higher interest rates. This observation can open a conversation about other ways to put your money to work. Though investing is covered in our Teaching Financial Literacy to Teens guide, most tweens are ready to learn about stock market basics – and the opportunity for higher returns.
 
Tell them that the stock market is a place where people buy and sell (or trade) stocks and other financial products. Some of this trading takes place in a physical location, but most happens over the Internet (electronically). Stocks, by definition, are units of ownership in a company, but most kids won't necessarily understand that explanation. Instead, explain that if you buy stock in a company, you own a tiny piece of that company. Give an example they can relate to: Disney (DIS), DreamWorks Animation (DWA), SnapChat (SNAP), McDonald's (MCD), Nike (NKE) and Hasbro (HAS), for example.

People buy and sell stocks to try to make money; in many cases, people earn more money than they would by keeping their money in an interest earning bank account. Explain that while the money in a bank account is safe (you can't lose it), any money in the stock market is at risk: you could lose all the money you used to buy stocks. That’s the tradeoff: Low-risk investments like putting your money in a bank account offer low returns; higher-risk investments – like the stock market – give you the chance to make more money, but with no guarantees. (See also: Financial Concepts: The Risk/Return Tradeoff.)
 
If the company's profits increase, the value of your stock will increase also. Conversely – and this is important – if the company's profits fall, so will the value of your stock. If you sell your stock for more than you bought it, you can make a profit. If you sell your stock for less than you paid for it, you’ll lose money. The company's stock price changes every single day and even every single second throughout the trading session. (For more, see: Low vs. High-Risk Investments for Beginners.)
  
Your child might ask, "Why would a company want a bunch of people to own little pieces of it?" Explain that companies sell stock to get money to do things such as improve their existing products, create new products, hire more employees and research new technologies.
 

If possible, show your child a stock chart (such as the one above for Disney), pointing out that prices change over time. Review several charts from various companies and ask your child questions such as, "What’s something that could have made the stock’s price drop?" or "What would happen to your stock's value when price increased on this day?" Of course, we’re not looking for financial analyst answers here – the point is to get them thinking about companies and stocks. Explain that many people own more than one share of stock in a company: If you own 100 shares, for example, and the stock price increased by $1, your investment would have increased in value by $100. Make sure you point out what else can happen: If you own 100 shares and the stock price fell by $1, your investment would have lost $100 of value. And that’s normal – stock prices go up and down all the time. For most people, it’s what happens in the long run that matters. (See also: How the Stock Market Works.)
 
Depending on your child's interest level, you can explain that different people have different goals with the stock market. Some people, called investors, buy a stock and hold onto it for a long time, hoping that price will slowly but steadily rise over time. Other people, called traders, buy a stock one day and sell it the next, or even after just a few seconds. These people try to capture small and frequent profits, rather than the slow and steady gains investors look for. (For more, see: Proof that Buy-and-Hold Investing Works.)