How to introduce your kids to investing

When you were young, you probably thought that investing was something reserved for stuffy old investors. But for today's generation of computer-savvy, media-saturated kids, investing isn't so foreign or intimidating a concept. With the right tools and preparation, you can teach your children the basic principles of investing and help them get started on building a bright financial future.

Introduce Investing Early On

Why start the learning when children are still young? Because kids possess something precious that adults will never have as much of -- time. The value of time for accumulating wealth cannot be underestimated, and kids who take advantage of it are way ahead of the game.

Many experts think that children can begin to learn about investing at age eight or nine and actually become investors as teens, but parents can start laying the groundwork for kids to grasp investment principles as early as preschool.

At age 4 or 5, children understand that different companies make different products. Does your child have a favorite candy bar or toy? Chances are they are aware of different brands and have already found some favorites. Explain how those brands are actually companies that sell products and services to make money, and buying stock in a company is like becoming a partial owner of the company.

Teach Key Concepts

Be sure to cover the concept of risk and reward when it comes to investing. Kids need to understand that the higher an anticipated reward from an investment, the higher the potential risk of losing money. When it comes time to actually start investing, help your child set short and long-term goals, which will help them decide whether a particular investment would be appropriate. For example, if a child wants to buy a pair of in-line skates in a few months, a simple savings account is the way to go. But if they want to buy a car when they turn 16, consider investing in stocks or mutual funds through a custodial account provided they have 10 or more years to save.

Get Started with Stocks

Another way to ease an adolescent into investing is to get them involved in your own stock market activity. Have your child help you look up stock quotes in the daily newspaper or online. Talk about why you've chosen various stocks and ask your child what companies are interesting to them. If you're a member of an investment club, bring your child to meetings. Or start a club of your own with the guidance of the National Association of Investors Corporation.

Consider Mutual Funds

Mutual funds are a lower-risk way for young people to gain investing experience. Rather than buying stock in just one or a few companies, kids can invest in a mutual fund consisting of dozens or even hundreds of companies. Many mutual funds also allow kid-friendly smaller investments. Check with fund families you like to see if they have a fund that is specifically targeted to young investors or if they offer educational materials written for children.

Stay Involved

The key to kids' investing success is parental involvement. Communicate with your child about the investment program you've set up and continue to work with them to meet their financial goals. Set up a weekly or monthly "business meeting" to discuss the performance of the stocks and mutual funds in your child's portfolio. You'll probably learn a thing or two about the market yourself, but more importantly, you'll be preparing your child to achieve investing success in adulthood.