Kids and the Stock Market

The stock market. We
hear about it every day: the bull market, the bear market, speculators,
investors, hedge funds, futures, and on and on. Some people seem to get rich,
while others meet with little success.

Kids are curious
about the stock market. It certainly looks exciting when the trading floor is
seen on the evening news, with all those traders waving papers and yelling and bells
ringing at the end of the trading day. When kids are old enough to understand
the concepts of money and ownership, it’s a good idea to introduce them to the
stock market and how it operates.If they learn to invest wisely at a young age, they may be able to grow
significant nest eggs as they become adults.

There are a few basic
concepts that kids can understand about how investing works:

1. Adding value. A
dollar is a dollar. It just sits there. When we invest, we speak of
“putting a dollar to work.” How? When we buy stock, we are using our
dollars to purchase part ownership–a “share”–in a company that creates value.
What does this mean? Look at it this way. If you give your child some wood,
nails, and paint, your child will create a birdhouse. Your child has taken
unrelated items–the wood, nails, and paint–and by using his or her own talents has
created something of value. The new birdhouse will have more value than the
cost of the original materials.

2. Value rises and
falls. It’s true that some companies fail to add value. The birdhouses they
make are not good or don’t sell. Other companies, however, succeed in adding
value. Think about Google. In August 2004, you could have purchased an initial
share of Google stock for $85.00. By November of 2007 the value of a share of
Google stock was $730.00. That’s an increase of over 800%. Of course, as of October
1, 2008 the stock had declined to $411 per share. But that’s still an increase of
483% from the initial price of $85.

3. You get your cash
back when you sell your stock. When you buy stock, you spend money to buy
something. A few months or years later you can sell it. When you want to sell
it, you go to a “market.”

The stock market
began in 1792 when 24 stockbrokers in New York signed the “Buttonwood
Agreement” under a buttonwood tree outside of 68 Wall Street. If you
wanted to buy or sell stock, you had to go and meet with a broker under the
buttonwood tree. Eventually the trading site was moved to the Tontine Coffee
House, and on March 8, 1817, the organization drafted a constitution and
renamed itself the “New York Stock & Exchange Board.In 1817 the NYSE
rented a room for $200 a month at 40 Wall Street.

Today, you don’t have
to go to a market; you can buy and sell your shares of stock using your
computer to communicate with the exchange. But you still need a buyer for your
stock. Hopefully, there will be a buyer who will pay you more than you paid to buy the stock,
and you will make a profit.

How do you get kids
started? Pick a company, preferably one that interests your child, such as a
car company or a cell phone company. Do some research and find the basic facts. Then,
buy a few shares of stock. The important thing is to remember that stock
ownership is best approached as a very long-term activity. Stocks go up and
down in the short term, but in the long run are often a very good investment.