As parents, it’s natural to want to give your kids the tools they need to succeed financially. One important lesson in today’s world is understanding the stock market. This can feel overwhelming, but with the right approach, your children can easily grasp the concept.
When my daughters were seven and nine years old, I had the chance to explain the stock market to them, and I want to share how I did it, using examples they could relate to – like McDonald’s and Lego.
Start with what they know: McDonald’s
When teaching kids about investing, it’s helpful to start with companies they recognise. For my daughters, McDonald’s was the perfect example.
I began by explaining that when we invest in a company, we own a small part of it. So, if we invest in McDonald’s, it’s like having a tiny piece of the restaurant chain. When people go to McDonald’s and buy burgers, a small part of that money actually comes back to us because we own a piece of the company. The same applies to other companies like Apple or Disney – if we own shares in them, we benefit when people buy their products or visit their theme parks.
This made sense to them. They understood that when people spend money at places like McDonald’s or Disneyland, the companies make money – and so do we because we’re partial owners of those companies through our investments.
You can imagine how excited they were when they found out that they own a piece of Disney!
Why do people invest?
The next step was explaining why people invest in companies like McDonald’s. I told them that the money we save and invest goes toward helping companies grow. If McDonald’s wants to open new restaurants or create new menu items, it uses the money from investors like us. The hope is that by growing, these companies will earn more money, which will increase the value of our investment.
For example, if we buy £10 worth of McDonald’s stock, and McDonald’s grows and becomes more profitable, our £10 investment could be worth £20 in the future. This is the essence of investing – you put money into a company with the hope that its value will increase over time, helping your savings grow.
Ultimately, when people (or businesses) spend money, that money goes to companies. Those companies are owned by investors. So as long as people keep spending, investors will see their money grow over the long term.
Understanding market fluctuations: The coronavirus example
Of course, the stock market isn’t always smooth sailing. I used the example of the Covid-19 pandemic to explain how the value of companies can go up and down.
With people staying at home during lockdowns, McDonald’s saw fewer customers, and its stock price dropped. I told them that while the stock might have fallen from £10 to £5, this wasn’t the end of the story.
The important lesson I shared was that stock prices don’t stay down forever. As the world recovers and people return to McDonald’s, its value could rise again. In fact, if we buy McDonald’s stock when its price is lower (like at £5), we’re getting it at a bargain. If it rises back to £10 or £20, our investment grows much faster.
My daughter actually shared this lesson with her class during an online "show and tell". I was proud to hear her explain that sometimes the stock market goes down, but that doesn’t mean we should panic – it’s often an opportunity to invest at a lower price and see bigger gains in the future.
Teaching about risk: Companies can go bust
One of the more advanced lessons I covered with my daughters was about the risk of investing. I explained that while many companies do well, some can go bankrupt.
I used the example of Blockbuster, the video rental store, to help them understand (although I had to teach them what a video player was, which made me feel old!). When Netflix came along, people stopped renting movies, and Blockbuster went out of business.
I then told them that we can reduce the risk of losing money by investing in a variety of companies – this is called “diversification”. To make this clear, I used Lego bricks.
Explaining diversification with Lego
I explained that if we invested in 10 companies, each one was like a single Lego brick. If two of those companies went bust (like Blockbuster Video did), we’d lose those two bricks. But if the other eight companies did really well (like Netflix), they might grow from one Lego brick into five or more. That means that even if a few companies fail, the ones that succeed could help our overall investment grow.
Diversification helps spread risk, so we don’t rely too heavily on any one company. This simple analogy helped my daughters understand how investing in a mix of companies can protect us from big losses. Especially as their money is invested in an investment fund, which invests in thousands of the world’s largest companies.
Explaining investing in the stock market using trees
This is another fun way to help kids learn about investing.
Investing in stocks is like planting an apple tree in an orchard. Year after year, it grows, producing apples. There are good seasons and tough ones, but over time, the tree produces something real and valuable.
Stocks work in a similar way – they represent real companies creating products and services, generating value over time.
The younger they start planting the apple trees, the bigger their orchard will become!
The big takeaway
At the end of the day, the key lesson I wanted to teach my kids was that money can grow through smart investing and that they can own a piece of the companies they like. Whether it’s McDonald’s, Apple, or Disney, investing gives them away to share in the success of those companies.
I hope this story has inspired you to start talking to your own kids about investing. They might not understand all the details just yet, but by teaching them the basics early, you’ll be giving them an important financial skill that will last a lifetime.
About the author
Will Rainey is a writer and speaker focused on helping parents teach their kids about money. He is the author of the children's book, Grandpa's Fortune Fables. His work has appeared in the Financial Times, iNews, and The National News. His website bluetreesavings.com has helped thousands of parents start talking to their kids about money. Before starting bluetreesavings.com, Will was an award-winning investment consultant. He provided investment advice to governments, insurance companies, and some of the world's largest pension schemes.
