My journey to becoming a stock market guru (tongue planted firmly in cheek) started with a single share of Eastman Kodak stock. I don't remember receiving it, so I'm guessing my grandparents bought each grandchild a share either when we were newborns or at least when I was still very young.
In the 1970s and 80s, Kodak and Xerox dominated the business landscape of Rochester, NY, where I grew up. My dad worked for Xerox during the first half of my childhood and Kodak during the second half. Lots of my friends' parents worked for them, too.
The newspapers I started delivering around 5th grade always led with the business section with news concerning Kodak and Xerox. And at 6:16 p.m. every night, immediately following the weather report, the local TV news would display the daily change in Kodak's and Xerox's stock prices. Given the heavy local emphasis, Kodak stock was an outstanding gift to give a kid growing up in Rochester.
The other outstanding teaching aspect of Kodak stock was the fact that it paid a dividend. Every quarter, a Kodak check would arrive in the mail with my name on it. Nevermind that these checks were typically for 25 or 50 cents. It was free money! In the mail! For me! I don't specifically remember tying this "free" money to the performance of the company, but I'm sure my parents explained it was because I owned a tiny piece of the company and I was sharing in its profits. (I never did make the connection that as a part-owner of the company my dad worked for, I was technically kind of his boss. Probably just as well.)
Kodak stock had some interesting stuff happen when I was in my teens. There were a couple of 3:2 stock splits along the way. Given that my single share couldn't become 1½ shares, Kodak generously sent me the extra half share in cash. Those were attention-grabbers: $20-$25 checks at ages 12 and 15 were definitely welcome!
From the lows of the late 1970s to the highs of the late 1990s, Kodak stock went up about four-fold. I learned a lot of lessons about business and the stock market through my early interaction with my single share of stock. It spurred questions that gave my parents the opportunity to discuss issues with me that may have never come up otherwise. Plus my Kodak stock fed the local economy by providing me money for candy and Slurpees at the local 7-11.
I have no idea how my grandparents went about purchasing that single share, but today it's easy for parents or grandparents who want to do something similar. Companies such as OneShare.com make it a breeze to buy a single share of company stock, and they specialize in the types of companies kids like, such as Disney, Dreamworks, Nintendo, Build-A-Bear, and so forth.
A nice option that OneShare offers (that I didn't have) is an actual stock certificate. They frame it up nicely (which, of course, you pay for) for Junior to hang on the wall. But again, if the goal is to stimulate conversation and interest, you could do worse than an intriguing stock certificate with Mickey and the gang hanging in their bedroom and a dividend check arriving quarterly in the mail.
Those who want a little less "show" and a little more "go" might prefer Sharebuilder.com. Now a Capital One subsidiary, ShareBuilder offers online stock trades for $6.95 (only $4 for automated ones) and no minimum to open an account. That's pretty kid friendly, and is especially useful if you want to use it as a teaching tool about how wealth is created. But you won't get the pretty stock certificate. (Sharebuilder is offering a $50 bonus to any new custodial account opened before the end of 2013, providing at least one trade is made by year-end.)
What I'm doing with my kids
Given my positive experience owning stock as a kid, you might expect my own kids all have stock certificates hanging on their walls, right? Wrong. It probably would have been a good idea, but it didn't happen. While that's bad news for them, it's good news for you because you get to hear about a different idea I've been using with my oldest child to teach her some basics of investing.
In addition to owning a share of stock, one of the other great teaching tools of my childhood was the traditional passbook-savings account. I had one from an early age, and regularly had to deposit half of my paper-route earnings into it for college. Between starting regular deposits at a young age and the sky-high interest rates of the late 70s and early 80s, that savings balance went up rather quickly! I still remember my older brother explaining to me that the bank paid him a nickel every day for doing nothing. No way! I was hooked.
Today, with savings-account yields near zero, trying to teach a youngster to save using a bank-savings account is about as de-motivating as it gets. "You left your money in all year and earned a penny! Isn't saving exciting?" Because of this, I moved my daughter's online bank account to LendingClub.com when she hit her teen years.
We've written about Lending Club before, but here's a quick overview for newer readers. It's a "peer-to-peer" lending site, which just means people lending to other people. Those who want to borrow have their credit information checked and rated by the site, and they post loan requests.
Investors can then choose to lend to them in small amounts. For example, someone trying to consolidate credit-card debt might ask for a $6,000 loan. That loan might eventually be funded by 240 investors who each put in $25. The theory is that by cutting out the bank middleman, the borrower can get a lower interest rate than he or she otherwise would receive, while the lenders get higher interest payments than they would get from traditional savings-type products.
Of course, lending to a stranger isn't as safe as lending to a bank, no matter how well Lending Club screens and rates the borrowers. It's helpful that the risk level for each loan is explained in a number of ways to potential lenders by Lending Club before anyone puts their money at risk. But any way you slice it, this is a riskier proposition than a bank savings account. Lesson #1 for my youngster: they're not paying you a higher interest rate than the bank was just because they're nice. There's more risk here.
Using a Lending Club account in this way is more hands-on than other savings vehicles would be. That's not always great. Sometimes neither she nor I feel like jumping on the computer together to look for new loans to fund when she has cash in her account. But along the way, we have had fantastic conversations about investing, covering everything from how banking typically works, to risk, return, diversification, compound interest, and so on. And when one of her very first loans went "boom" and defaulted on her — well, I'd never have wished for that to happen right out of the gate, but I'm also fairly certain it made a real-world impression on her that would have been difficult to duplicate any other way.
During my nearly 14 years with SMI, I've read countless articles on how to teach kids to save and invest. Some ideas are better than others. The main things I've come to believe are these:
- No matter what you say, your kids are probably going to learn more about money by observing how you actually handle it.
- That said, they do need you to teach them practical things about money. A tool such as a giving/saving/spending bank at an early age is great for getting the conversation started.
- Unlike an area of your finances where your decisions can be observed (such as spending), investing is one area where they may not be able to see what you're doing. You'll have to be more intentional in teaching them about this area.
- If you can engage your children little by little, on their own developmental schedule, that's probably best. Thus, you might consider buying the stock certificates when they're young and opening a Lending Club account as they get older. Both provide great teaching opportunities.
Obviously, there are many ways to engage kids regarding investing. I'm a parent with three still at home, so I totally understand the dreaded feeling that this is yet another area you're supposed to cover with them "in your free time." The good news is a little intentionality can go a long way, and any seeds you can plant now will only help them later.