Stock Portfolio for Children

Owning stock in real companies can be a valuable way for children to learn about the world of finance and practical lessons about money management. Giving your child or grandchild a gift of stock is not only a good investment for the long term--it can be an effective teaching tool as well.

What to Buy

Buy your child something she will be interested in. Certainly you want to invest in well run companies that will rise in value over the long term, but you also want to stimulate the child's imagination. Think toy company stocks, video game companies or sports companies--investments to which children can relate. Invest in a company that produces a tangible product the child may already use. Also consider giving an investment in an index fund, which can teach the value of broad stock ownership over time.

What to Teach

There are many concepts children can grasp from exposure to the stock market. Show your child in basic terms how the stock market works and the purposes it serves. Talk to him about risk versus reward, and the hard fact that he may lose money as well as make it. Explain the fees involved with mutual funds, and how the fees can cut into his investments. Tell the child about diversification, and how it can help spread risk. Explain the difference between saving for something he wants to buy and investing for his future financial health.

Tools

Give your child tools she can use to follow the portfolio you are creating. Show her how to look up a stock price, but counsel her that the day-to-day fluctuations of a stock price--while occasionally exciting--are not the important thing. It's all about how much the investment will be worth in five, 10 or even 20 years.

Evaluate Companies Together

One of the key ideas about stock picking is being able to evaluate a company and decide whether it's a good long-term investment. Talk to your child about company fundamentals and what to look for. You can also take a look at an annual report that's kid-friendly. Disney is a good place to start, as the company has won Liberty Financial's "Coolest Annual Report" contest.

Let Them Practice

Once your child owns a few shares and understands some key concepts, let him try a little stock picking for himself--but not with real cash just yet. Have him pick a fantasy portfolio and show him how to follow the stocks to see how his "investment" is progressing. There are also many online games and simulations that can achieve this. (See Resources section).

References

• The Mint: What is the Stock Market
• PBS: Investing 101

Resources

• Thinkquest: Investing for Kids
• National Stock Market Simulations