Investing in the stock market is not child's play, but that doesn't mean a kid can't do it. Legendary investor Warren Buffett was only 11 years old when he first invested in Cities Service Preferred (now known as energy company Citgo). That was in 1942, and today he is among the wealthiest investors in the world and at the helm of Berkshire Hathaway. Today, more resources than ever are out there for kids to gain exposure to Wall Street, tools ranging from investment clubs to the Internet, leading to exposure in stocks, bonds and mutual funds.
Warren Buffett began earning money as a child by selling packs of bubble gum (incidentally, he went on to finance candy maker Mars' acquisition of gum company Wrigley). He learned the value of a dollar at an early age, which led him to begin investing in the stock market.
Today, with the availability of the Internet, more ways than running a bubble gum stand are available to make money. Websites such as eBay and Amazon.com, for instance, can serve as a profitable place for kids to unload unused and unwanted books, toys and sports equipment. These profits can serve as seed capital for an investment. Or, playing the role of a venture capital or private equity firm, a parent might want to invest in their child's ability to manage money, providing "seed capital" for a share of the profits.
Sometimes, it doesn't take much more than a few bucks to invest in the stock market.
Where to Invest
Kids are exposed to potential investments every day, e.g. in the cereal they eat (Kellogg), the vacations they go on (Walt Disney Co.) and the TV stations they watch (Nickelodeon, which is owned by Viacom). Use these real-life examples to teach your kids about becoming a partial owner in a company in which they already have a stake. Some of these companies provide incentives for kids to invest (see Resources below).
Kids can open a joint account at a brokerage firm, which facilitates the buy and sell orders for the investor, with an adult.
Kids also can invest directly in a company, eliminating the need for a middleman or broker, through dividend reinvestment plans (DRIPs) and direct stock purchase plans. These accounts operate like joint accounts, and the fees associated with investing directly in a company are minimal. Many companies offer them, including Hasbro, Coca-Cola and Johnson & Johnson, according to an online article on kids and investments (see References below).
Mutual funds are a way for kids to get exposed to the stock market because they often require low minimum investments. In fact, some accounts can be opened with as little as $100 to $500, and some kid-focused funds are in operation.
Monetta Young Investor Fund, for example, requires a $100 initial investment (see Resources below for an application). The child may need an adult to help establish an account (see Resources for other mutual fund ideas).
Warren Buffett purchased his first three shares of Cities Service at $38 per share during one of the most depressed financial market environments ever. Once the stock climbed $2 to $4 per share, he feverishly sold, pocketing a small profit. Over the next couple of years, the stock market rebounded, and shares of Citi Services soared to $200, leaving Buffett on the sidelines from those lucrative profits.
The experience served as a valuable lesson to him on the value of long-term investing. Some of the lessons kids learn through investing may be through trial and error, but the important thing to do is to never stop learning. Sometimes, an investment may lend itself to a shorter-term exposure for various reasons, but often, a patient investor can lead to a profitable one.