Stock Market for Kids
(How Kids Can Invest in the Stock Market)
Kids can absolutely invest in the stock market. Financial innovations and the availability of educational material specifically for young investors have made it possible for kids to learn about investing in stocks. In this article, we will discuss these innovations and tell you how to start kids investing in stocks.
Financial Innovations Help Kids Invest
Financial innovations such as 1) zero stock trading costs, 2) availability of fractional shares, and 3) new types of custodial brokerage accounts, have all made it easier for kids to invest in the stock market.
Trading Costs Have Come Down for Young Investors
Trading costs have come down dramatically in recent times. A few years ago, brokers charged anywhere from $4.95 to $6.95 each time you asked them to make a stock trade on your behalf. However, a significant shift has occurred, resulting in the emergence of no-fee trading accounts.
One company, Robinhood, began offering a brokerage service to help investors buy and sell stocks without paying a dime in commission and without a minimum balance – all through a mobile app. These actions by Robinhood forced many of the major online brokers to eliminate commissions and continue to reduce their minimum balance requirements.
At the time of this writing, major online brokers such as TD Ameritrade, Fidelity, Charles Schwab, E*Trade, Merrill Edge, and others have made similar moves to keep pace with Robinhood and other low-cost online brokers.
The reduction in trading fees has made investing in the stock market more accessible to kid investors.
Fractional Shares Now Available
Some stocks are so expensive (with some in the hundreds to thousands of dollars per share) that they are out of the reach of an investor with little cash. One solution brokers offer is allowing investors to buy a fraction of a share. Purchasing fractional shares lets you buy any stock you choose according to your means.
To see the benefit of buying fractional shares, consider what you would do if you wanted to buy the stock of the parent company of Google, Alphabet. The current cost of a share of Alphabet is about $2,300. Chances are that you don’t have that kind of money to invest in Alphabet stock, but you may be able to gather a more modest sum such as $23 for the investment.
A $23 investment translates to 1% of the $2,300 ($23 = 1% * $2,300) value of Alphabet stock. Some newer online brokers that allow the buying and selling of fractional shares include Robinhood, Stockpile, Interactive Brokers, and M1 Finance. However, some of the bigger traditional brokers with an online presence such as Fidelity and Charles Schwab have also entered the fray. We believe that this offering to investors increases the accessibility of stocks to kids who are interested in investing in the stock market.
New Types of Custodial Brokerage Accounts for Kids
Kids under 18 can’t own stocks, mutual funds, and other financial assets outright. They can only buy into those investments under their parents’ (or adult) supervision through custodial brokerage accounts, which online brokers offer.
Legally, the kids would own the assets in the custodial account, but the kids would control their investments until there are no longer minors.
A full explanation of custodial accounts can be found here: How To Open Custodial Accounts.
Many parents use custodial accounts to help their kids learn about the stock market. Important considerations when choosing custodial brokerage accounts for kids include looking for:
No stock trading fees – you should find online brokers that charge $0 to buy and sell stocks.
Low balance stock trading accounts – make sure the online broker does not require you to maintain a sizeable minimum balance in a trading account; many offer a $0 minimum balance.
Brokers that allow for fractional shares – if you want kids to invest as little as $1 in reputable companies with high stock prices, they can do so if the online broker allows them to buy fractions of a share of stock.
New companies with custodial brokerage accounts have emerged to help kids invest in stocks with their parents’ acquiescence or participation. Some companies that allow parents to establish trading accounts for their kids have apps specifically geared towards the teen/young adult demographic. Examples include:
The list of top online brokers appropriate for teen investors can be found here: Teen-Friendly Online Brokers.
Some of the companies on this list, such as Greenlight, Loved Investing, and Bloom are relatively new and were established specifically to serve teen investors and their parents. They offer investing apps that make it easy to open investment accounts for teens and for these teens to invest in stocks with their parents’ approval. The Fidelity Youth Account is technically not a custodial account, but it allows kids to invest in stocks as long as parents have an account with Fidelity.
How Do You Know if Kids are Ready to Invest?
How would parents know if their kids are ready to become stock investors? Have they shown any skills in handling money, no matter how small the amount is at their disposal? It depends on the lessons they have already learned at home up to this point.
Take The Quiz: Is Your Teen Ready To Invest In Stocks?
Parents who can afford to do so can help their teens manage money by giving them a regular allowance, no matter how small their budget. We emphasize providing allowance on a fixed schedule to help them plan for long-term expenses and things they may want to buy.
Parents may also want to consider tying allowance to chores around the house. We discourage parents from paying for tasks their kids should be doing anyway, such as cleaning up their room or the bathroom they use. These chores should be tasks above and beyond what you would typically expect of your teen.
Overall, basic money management skills, including the ability to save (through a bank account), are precursors to kids beginning their investing journey.
Click on the image to determine if a kid is ready to invest in the stock market.
Stocks for Kids
The best stocks for kids or any investor are the ones they choose after a deep analysis of how the companies are likely to perform in the future. For beginning investors, this analysis is difficult to do without some knowledge of the things that make stocks move up or down.
Stock For Kids. Stock Basics Made Simple Video
Unfortunately, thousands of stocks are listed on US stock exchanges. Researching each of these companies is an impossible task. It is wiser for young investors to begin their investing journey by looking at the stocks of big companies, such as the ones found in an index like the Dow Jones Industrial Average (the Dow).
The Dow is an index that can give an investor a general idea of the health of the overall stock market. It consists of 30 companies, some of which you may already know, such as Verizon, Nike, Mcdonald's, Microsoft, Coca-Cola, etc. While all stocks are risky, stocks of big companies that have been around for 20 years or more and have been through bad times are not likely to have large swings in value.
I have included a link to the companies in the Dow so you can see the other big companies in the index that may be candidates for young investors.
Another way kids can choose stocks before doing detailed financial analysis is to consider the stocks of companies that produce brands teens like based on a survey of 7,000 teens by Piper Sandler called Taking Stock with Teens. Examples of some of these brands and the companies that offer them include:
Footwear – Nike Shoes (Nike, Inc.); Vans Shoes (VF Corporation)
Restaurants – Chipotle (Chipotle Mexican Grill, Inc.); McDonald’s (McDonald’s Corporation)
Handbags – Coach Bags (Tapestry, Inc.), Michael Kors Bags (Capri Holdings)
Snacks – Goldfish Snacks (Campbell Soup Company); Lays Potato Chips (PePsiCo, Inc.)
Clothing Brands – American Eagle (American Eagle Outfitters, Inc.); Lululemon (Lululemon Athletica, Inc.)
Payment Apps – Apple Pay (Apple, Inc.); Cash App (Block, Inc.)
Whether a kid investor is choosing the stock of a big company or the stock of a company that produces a brand they like, they have to do one thing – get a copy of the company's annual report so they can understand the company's business. An annual report is explained in the next section of this article.
Doing Basic Research with Annual Reports
While a kid investor may find it difficult to do deep fundamental research on a company before investing in its stock, they can do some basic reading about its operations. The information about the company's operations can be found in its annual report.
An annual report is a document through which most public companies disclose corporate information to their stockholders each year. It is usually a state-of-the-company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs.
Annual reports are easy to find with a quick Google search. For example, typing "General Electric annual report" into the Google search bar will probably show search results for the "investor relations" section of General Electric's website, leading you to the company's latest annual report.
Here are some links to the annual reports of a few well-known companies: McDonald's, Apple, and Coca-Cola. Two very important tables in the annual report are the Balance Sheet and the Income Statement. To understand how to read these reports and how to use them, click on the links to get to these reports.
Using Stock Symbols to Get Company Information
To get the price of a company's stock or detailed financial information about a company, a kid investor needs the stock symbol for the company. US Stock symbols are generally 2-3 characters long and don't always correspond to the company's name or the name of the product it makes. For example, the company that makes the Coach brand of handbags is Tapestry, Inc. To get the stock symbol for Tapestry, Inc (and to get financial information on the company), a young investor should type "Tapestry" into the search bar of Yahoo!Finance – an excellent portal for financial information. Doing so will show the company's stock symbol is TPR. Here is the link to the Tapestry Inc. information at Yahoo!Finance: Tapestry.
Exchange-Traded Funds for Kids
Investing in one share of stock can be risky even if the stock is issued by a big company. It is better for kids to invest in a few stocks at once in order to achieve what is referred to as diversification — the idea that the value of a portfolio consisting of stocks in different industries is more stable than the value of any one particular stock. Diversification basically considerably reduces the risk that any one investment going bad is going to sink an overall portfolio.
One solution to reduce the risk of investing in stocks is to invest in a basket of stocks through Exchange-Traded Funds (ETFs).
Most ETFs trading in the marketplace are index-based. An index, as I explained earlier, is used to gauge the movement of the broad market. Some of the index-based ETFs seek to deliver the same return as the major US indexes like the Dow, the S&P 500, and the NASDAQ.
The following are the stock symbols for ETF’s associated with the 3 indexes in the above table:
Stock Market Exchanges
Stocks are bought and sold through stock exchanges – institutions such as the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). Each of these exchanges has its own rules and regulations that govern which companies can be listed on them.
Launched in 1817, the NYSE lists some of the biggest companies in the United States. The American Stock Exchange, which was launched in 1842 and was commonly viewed as the younger sibling of the NYSE, merged with the NYSE in 2008. NASDAQ was started in 1971 as the exchange for smaller companies, but it has grown to include some of the biggest technology companies in the United States. For example, Tesla is listed on the NASDAQ while General Electric is listed on the NYSE.
Kids don’t have to know whether a stock is listed on the NYSE or NASDAQ when they want to buy or sell shares. Their online brokers will simply buy the shares for them – these brokers are the ones who have to know where to go.
At the end of each day, these exchanges record what is known as closing prices for each stock. Closing prices are generally the last price during the day at which the stock was bought or sold. The closing prices in these exchanges are often used to tell how the stock market is doing.
Dummy Stock Portfolios
There are a few sites that will let teen investors set up dummy stock portfolios to trade stocks with virtual dollars. With these sites, they can play with stocks without risking real money while learning how and why stock prices move up and down. The most important lessons kids interested in the stock market can learn from these dummy portfolio portals is that investing is not a way to get rich quickly.
After kid investors set up a dummy stock portfolio, the site will tally up the value of the stocks on a daily basis. The websites use real trading data from US stock exchanges to tabulate the value of the portfolios.
Our mock portfolio portal is MockPortfolios.com. Other popular mock trading platforms include Wall Street Survivor, How the Market Works, and MarketWatch Virtual Stock Exchange.
Resources to Help Kids Invest
Today, there are plenty of resources that will help kids invest in the stock market. Here are some examples:
TeenVestor.com – This is the only website with a full array of free educational material for teen investors and their parents. We teach teens about stocks, funds, the economy, etc. See press materials here about us.
Andrei Jikh (Youtube Channel) – This is a good resource that teaches basic investing and economic concepts for beginning investors.
TeenBusiness (Youtube Channel) – This is the only channel specifically devoted to teaching kids how to invest in stocks.
Investor.gov – This site is by the Securities and Exchange Commission (SEC), which regulates securities in the United States. The site provides investor education for kids covering stocks, ETFs, and other investments.
How the Market Works – This website, which also runs a stock market trading game, also has an education section with some lessons about the stock market.
Wall Street Survivor – This website, which also runs a stock market trading game also has an education section with some lessons about the stock market.
Another way for kids to get basic knowledge about the stock market is to sign up for some online courses. We offer the TeenVestor Stock Certification Course which consists of text, video lessons, and quizzes to help teenagers understand the stock market. There are other online courses offered at platforms like Udemy to teach kids about the stock market.