The recent stock market mania over the video game company GameStop, which this week was scrutinized by Congress, has provided a teachable moment for kids.
The Associated Press talked to a few parents and financial experts for their tips on talking with kids about investing and the often confusing behavior of financial markets. Here's a summary of what they had to say.
KEEP IT SIMPLE
Parents should make sure kids understand money basics before they try to conquer investing. Once they're ready, don’t overwhelm kids with too much information at once — you risk them missing the lesson and losing interest.
Kids need to understand what stocks are, why people invest and how the markets work before they can understand investing.
“The best way to get kids interested in investing is to speak their language,” said Carrie Schwab-Pomerantz, financial literacy expert and senior vice president at Charles Schwab & Co. “Start by explaining that investing is a means of using your money to try to create more money."
There are plenty of good resources — websites, apps, books — available to help guide the way in talking with kids about money and investing (or to help bolster parents' own knowledge).
If they seem ready, let kids give investing a try.
Consider one of the many apps and games out there that allow people to simulate investing experiences. Those provide a good first step in a safe environment, said Paul Golden, spokesman for the National Endowment for Financial Education.
Try one that shows gains over a long period of time, 10 or 20 years, as that better illustrates the benefits of long-term investing.
Parents can also help kids identify companies they are interested in and track them using fictitious money just for fun. That presents an opportunity to explain why a stock might rise and fall in value at different points.
“If you are going to encourage your kid to buy stock help them to understand and have a point of view on why they should buy a stock,” said Louis Taylor, president of Taylor Wealth Management in Oregon and father of two.
You don’t need to explain balance sheets, price-to-earnings ratios or anything technical just yet. Just help them establish clearer thinking about their decision-making process.
Taylor took this approach when several college students approached him during the GameStop runup asking if they should invest. Instead, he asked them why they would invest in GameStop if they don’t even shop there. He was able to help them conclude that maybe there was little underlying value in the company.
“I think you should buy stock, but know why you are buying it,” he said. “If you are passionate about (a stock) because you have a belief in a brand, that’s one thing. Don’t do it because you saw it on a message board.”
Some parents open custodial brokerage accounts, which can be used to invest in stocks, bonds, mutual funds and more. The assets belong to the child but the adult holds control until they reach adulthood. Some parents allow the children to have some say in how these are invested as a learning opportunity.
Jordan Wexler, CEO of EarlyBird, an app that specializes in custodial funds, said tying the concept of investing to something in their real life helps it come to life.
“Talking with them about their favorite interests and activities can lead to a much larger conversation about investing in valuable companies in a way that makes sense for them," he said.
If the kids were intrigued by GameStop, talk about it.
Don't understand it? Here's a quick recap: GameStop is a struggling brick-and-mortar video game retailer. Some hedge funds and other big investors had little faith in it and “shorted” the stock, essentially betting its share price would fall. But some smaller investors decided to drive up the price by buying in.
When a stock is very heavily shorted, a rise in its price can force short sellers to get out of their bets. To do that, they have to buy the stock, which pushes the price even higher and can create a feedback loop. As GameStop’s short sellers got squeezed last month, smaller and first-time investors used online forums to encourage each other to keep the momentum going.
The stock traded below $10 for most of 2019 and 2020. This “short squeeze" sent it above $480 last month before it dropped back to around $40 as of Thursday.
Yes, some people made money. But some people lost big too.
Seize the opportunity to talk about how different investments involve different levels of risk. Higher risk investments can result in big gains, but big losses as well. Also, mention how some investors might be able to bear those losses more than others.
THE LONG GAME
Ray Medeiros said he has long talked to his boys — ages 16 and 18 — about the importance of investing to build wealth. He worried they might be sucked in by the allure of a quick buck by GameStop. But he talked with them about how investing is a long-term endeavor. He also urged them to always think less like a day trader, who often lose, and more like Warren Buffett.
“I told them if they wanted to invest in high risk, do it with money that you wouldn’t miss if you lost it all, kind of like the scratch tickets," Mederios said.
Jacklynn Manning kept it simple for her boys, ages 9 and 10. She explained some stock market basics, including how non-professional investors can "make a good profit if you play smart and conservatively, or maybe a great loss, if they get too greedy."
Children, especially teens who are on social media, paid attention to GameStop primarily because people are talking about it on social media platforms that they engage with. Teach them how to discern between good advice and bad. And remind them that you can't trust everything you read online.
Parents should also recognize that investing looks different these days. Robinhood, for example, has been accused of trying to lure young people with little or no experience trading stocks by including features on its trading platform that resemble gaming apps, such as showering a user’s screen with virtual confetti every time they make a trade.
The company has defended its practices and notes that it provides educational tools to its customers.
“While it’s a teachable moment, parents should reinforce that investing is not a game," Golden said. “Investing helps achieve long-term goals."