Investment- A family Activity

Anjali wants to know what her Papa is discussing with some random bank uncle over the phone. She goes to her mom expecting an answer, while her mom is busy in the kitchen. She asks her mom, “Mommy, what is Papa talking on the phone?”  Her mom ignores her inquisitiveness and answers her, “Beta, Papa is talking to his friend.” But little Anjali startles her by asking her the next question: “Then why he is talking about so much money with his friend. I never talk to Rhea about Paisa. We talk about playing with Barbies and dresses!!!!” Her mother is surprised to hear such a statement from a 5-year old girl. Now she is at loss of words on how to explain her concept of INVESTMENT.

  

  So what is Investment??

Investment is putting money into something with the expectation of profit. Speaking in financial terms, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income (dividends), or appreciation (capital gains) of the value of the instrument. 

Making an Investment for a lifetime

Although investment is usually done by the elders of a family, it should be a Family Activity. As the children become more aware of money and other financial concepts, it is vital that the parents arm them with some important investment knowledge.

Teaching children about Investment is of utmost importance. When I asked some parents how do they intend to make their children understand, some said that they are not sure but some said they have consciously thought about it and have devised a plan. They give their tips:

Investing Should Be a Family Activity

Some parents are guilty of not discussing personal finance with their children; almost all parents are guilty of not discussing investing with their children. Investing should be a family activity. Children mature at different rates, so it may take some time before your child is ready to tackle concepts like portfolio creation and asset allocation; however, the basics of investing can be taught quite young.

        Risk and Reward                                                                                    

       It is important to make the children understand the risk that involves in investment and also the rewards that the investment brings. Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that your investment experiences over time - the return on investment (ROI).

            

            Easy Ideas to Tell Your Kids About: Stocks                                                            

      Stocks are variable risk, variable return investments. On the whole, they are categorized as high risk and high return. One should make it clear to their kids that all the risks involved in the stock markets can't be predicted. They should be made understood that although stocks yield maximum returns, they are highly unpredictable.                       

      

      Easy Ideas to Tell Your Kids About: Debt Securities

     A bond is a low-risk, low-return investment. Typically, bonds pay only a small amount over the prime interest rate because they are backed by stable institutions (usually banks or governments). You can buy bonds from unstable regions of the world that offer better returns, but these countries often have unstable governments, so you can't necessarily count on getting that return down the road. 

     Therefore, it may be best start your child with stocks and explain that bonds become more important as you age and need guaranteed investments. Your child will probably not have enough money to make bonds worthwhile, and may actually lose money to inflation.

Getting Your Child's Attention
When you are checking your stocks, show your child the companies of which you own a small part. If you own any exciting companies that might be of interest to the kids - like video game companies like Sony and Disney characters.

Then you can ask your child what company he or she would like to buy. Children have favorites even if they are not aware of them. For example, Nike, Sony and Disney are popular with most children.

Buying and Tracking

Once you have introduced your child to some basic concepts, you can sit down together allow him or her to select a company. If you have the money, you can buy the stock and track it with your child.

If you are able to pick stocks together and track them when your children are young, they will get a sense of the up-and-down cycles that stocks go through. This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic.

During all this, you want to allow your child to make real decisions and take real risks. Yes, your child may lose money, but the purpose of this exercise is to familiarize your child with investing. Part of this exercise is learning that any investment has advantages and disadvantages. Your child may not make a fortune, but the experience of gaining and losing money is almost as valuable.