Teach Your Child the Power of Investing

If you want your child to master the finance game, and become fabulously wealthy at the same time, it is not enough for you to simply teach them the importance of saving, budgeting, and staying out of debt. You must also teach them the power of investing.

In the most simple terms, investing is defined as "allocating financial resources towards a given endeavor with the expectation of a handsome return." When you invest your money, you invest with the expectation that not only will you get your money back, but that you will get it back plus some.

The ability to get returns on your money is the reason why so many people invest their money in stocks, bonds, real estate, and businesses. The goal is always to get back more than what you put in. There is so much investment advice out there that one can become overwhelmed when trying to absorb even a fraction of it.

If you are a responsible parent who wants to see your child become a successful investor, one of the primary questions you are probably asking yourself is which investment advice should you take? Start off with something simple.

This is a subject that you do not want to complicate. It is best to start off with basic concepts, explaining to the child how investing works. For example, you could pretend as if you are a company, and as the child to "invest" in you by giving you $5.

When they give you $5, you hand them back $10, which is twice the amount they invested. You could explain to them that this is called a positive return. To illustrate a negative return, you could ask them to give you $5, and then you hand them back $2.50. You are now showing them that they lost money on their investment, half of what they put in.

Teach your child the power of fundamental analysis, not technical analysis.   There are two broad approaches that investors use to invest in the market, and these approaches are called fundamental analysis and technical analysis.

Fundamental analysis involves studying the company or product you wish to invest in to determine whether or not it is fundamentally sound.

Some positive factors that could make a company attractive for investment includes no debt, the invention of new or critical technology, or the company is in an industry which is booming. Technical analysis involves studying charts and graphs to determine the potential movements of a stock's price.

The biggest problem with technical analysis is that it will likely bore your children, and it is not very effective. The reason why it is not effective is because it is absolutely impossible to measure the movements of a stock price within a short period of time.

Short term fluctuations in the market are truly random, and there is no chart or software program which can accurately prove which direction the stock price will move in on a consistent basis.

If you want your child to become a great investor, you must teach them the importance of being patient. If your child makes rash investment decisions without taking the time to study the market, they can easily lose everything they have invested.

The decision to buy or sell should always be made after the child has done a great deal of research in the market, and the decision to buy or sell should always be made for logical, as opposed to emotional reasons.

In addition to patience, a truly great investor is also someone who reads a lot, and gets their information from reliable and unbiased sources.

Children must be taught to read early if they are to become great investors.  Trying to make sound investment decisions without reading is like trying drive a car without gas: it simply is not possible.

A good investor is an individual who spends time reading a variety of different materials from numerous sources in order to determine whether not an investment is good.

Getting your information from one source is inefficient because that source may have a vested interest in only releasing positive news with regard to the investment, as opposed to negative coverage.