With the Dow Jones Industrial Average, more commonly called "the Dow," hovering at the 14,000 mark for the first time in five years, the stock market is a popular news topic. This is a good opportunity to teach your kids about the stock market.
Not everyone is going to want to invest, but everyone should know how it works. It's one more thing that money can do, another part of the big picture of money as a life skill -- and it's an empowering skill -- a real adult activity that teenagers can take an interest in.
Who is Dow Jones anyway? Dow Jones & Company is a financial news publisher that researches the stock market. This research is used by investors to help predict when stocks will increase or decrease in value. The Dow is a number that indicates the average of closing prices of 30 selected stocks. These stocks are chosen because their performance is a good indicator of how the stock market is doing overall. If the Dow is rising, the rest of the market is generally rising too.
The stock market was created, in part, so that the general public could invest their money, and perhaps make money, in a company they believed held promise. On the other side of the coin, the stock market system can help a company that is publicly traded (offers stock to the public) gain additional financial support, which is sometimes used to improve and expand the business.
What is stock? It is a small piece of a company that can be purchased. The piece of paper that shows ownership of stock is called a stock certificate, and it is issued only by the company. Stock certificates are bought and sold at the stock market. The people who buy and sell stock are called stockbrokers, and the people who own stock are called stockholders or shareholders. Stockbrokers are paid commissions.
Let your teen start their own portfolio -- collection of stocks. The fun of following the stock market is a little like watching what your favorite sports team or movie star is doing. You become interested in the company/team/star and track their successes and failures.
A good way to start is by tracking a few companies that are associated with familiar products -- popular sneakers, fast food joints, computer games and so on. We all have to eat and take medicine, even when there may be less money than usual to spend. Food and drug stocks, therefore, are safer bets since they tend to hold their value even during troubled times. Other industries that remain pretty steady are gas, water and electric companies.
Another good way -- popular with idealistic teens -- is to do research and create an environmentally or socially conscious portfolio -- companies known to share your kid's own world views. Learn how your money can have a real world impact.
When you hold stock in a company, you can have a say in how the company is run. Every year, shareholders are invited to an annual shareholders' meeting. At the meeting they may vote on certain future company plans. Every share is worth one vote -- the more shares a person has, the more power that person has in company decision making.
Have your teen look up the companies on the stock pages of the newspaper and show him how to read the symbols on the page. Explain that the daily stock quotation is only a record of how the stock did that day. Just because a stock does well on one day doesn't mean it's going to be the same result the next day.
Know your investment goals. Do you want your money to grow to meet a future need, such as college? Or do you want income to spend right now? How much risk are you willing to take? Identifying your goals will help you determine which stock to buy. Research is important and there is plenty of information to be found on the internet, at the library and from your stockbroker, if you have one.
When ready, have your teen place an order - through you. You'll have to put the account jointly in your name and theirs until they are twenty-one. If you don't have a broker you can use a discount brokerage or an online service. Be sure to find out the associated fees. Stocks can be purchased in as little as one share increments.
Have your teen keep track of the stock once a week and read the annual report.
Keep in Mind:
- There is risk involved in owning stock, and a potential to lose some or all of your investment.
- Each stock transaction, purchase or sale, can have a fee attached.
- Stock sales and dividends have tax implications.
- Stocks are best as part of a diversified investment strategy.
Even if your kid does not plan on purchasing stock right away this is a good exercise. You can "buy" your stocks hypothetically using the steps I lay out, and follow them as if you owned them.
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