In a recent post, Austin asked what topics you’d like to see discussed more frequently on the blog. Several people said they’d like to see more about how to help kids get started with investing. So…

When are kids ready to invest?

According to research from the National Endowment for Financial Education, kids between the ages of 11 and 13 can understand what compound interest is all about. Those between 14 and 18 can understand diversification and the differences between stocks and bonds.

I think kids can generally understand some investing concepts even earlier.

Hopefully, starting at about age 4, you’ve been teaching your kids three of the essential things you can do with money: give it away, save it, or spend it. It’s been my experience that age 8 is about the right time to begin teaching a fourth option: investing.

Get them in the game

At SMI, our strategies rely on mutual funds and exchange-traded funds. However, for a young person, such investments will sound very abstract, whereas stock ownership is likely to be more easily understood.

After explaining that they could own a piece of a company they’re familiar with (McDonalds, Disney)—a very, very tiny piece of a company—you could help them buy a share from OneShare or GiveAShare. These companies will send you a framed stock certificate, helping make the idea of ownership a little more tangible. However, you’ll pay a hefty price for that certificate—$39 to $49 at OneShare.

I convinced our kids (ages 6, 8, and 11) to take a different route. We took a small amount of money from each of their savings accounts and used it to open custodial accounts at ShareBuilder. (In most states, you have to be 18 to have a brokerage account in your own name, so until then you’ll need to use a custodial account).

ShareBuilder isn’t perfect. Its lineup of no transaction fee (NTF) mutual funds is not very impressive. But it did have (and apparently still has) one big benefit: a $50 bonus when you make your first trade. So, we bought one share of stock in each account. While the $6.95 commission amounted to a sizeable percentage of the cost of that one share, the $50 bonus more than offset that.

Once our kids begin to understand mutual funds, we’ll eventually transfer this money to a broker that has a better selection of NTF funds.

Beware the required minimums

There are two types of minimums that need to be considered when investing with a child—the minimum amount a broker requires to open an account and the minimum amount needed to make a particular investment.

TD Ameritrade is a good choice for dealing with both. It has no minimum required amount for opening an account. And, if you want to use SMI’s Just-the-Basics strategy, all of the recommended ETFs (or suitable alternatives) are available commission-free.

A 100% stock-based J-t-B portfolio calls for 40% in the S&P 500, 40% in the U.S. extended market, and 20% in foreign stocks. At today’s prices, if you bought one share of IVV (a fine alternative to VOO), two shares of VXF, and two shares of VEU (a suitable alternative to VXUS), your youngster could have a well-diversified J-t-B portfolio for under $500.

Keep the conversation going

Now that our kids have some money invested in the stock market, it makes talking about investing easier. But it’s important to keep the conversation relevant to their areas of interest. Microsoft recently made for a good discussion topic when it purchased the company that makes one of our kids’ favorite online games: Minecraft.

What’s been your experience in helping kids get started with investing?