Welcome to the fourth week of Million Bazillion Academy, in which your kids will learn more about investing and how market professionals do their work.
We’ll explore:
- How the stock market works.
- How investing is different from saving.
- Why buying stocks comes with risks and potential rewards.
To help your kids gain this knowledge, we have hese resources:
- A “Million Bazillion” episode to listen to together.
- Answers to a follow-up question submitted by a “Million Bazillion” fan.
- A game about risk to play with your kids.
- Marketplace stories for kids and parents who want to delve deeper.
Listen to this!
The kids want to know!
Perry, age 7, asks: What do market forecasters do?
Market forecasters are people who spot patterns from the past to try to predict the future. They are kind of like fortune tellers, but they don’t use a crystal ball to see into the future. Instead, they use data and math to make educated guesses about whether stock prices will go up or down.
Many investors listen to forecasters because they want to make money when they buy stocks, not lose money. Forecasters help investors make smart decisions about what stocks to buy or sell. But that doesn’t mean the forecasters always get it right. Market forecasts are a bit like the weather forecasts; sometimes a meteorologist predicts it will rain tomorrow, but it ends up being sunny.
Now it’s your turn to think about the future and make some decisions about money. You could get richer as a result, but not without some risk. Let’s play a game!
Let’s play a game! Safe bets and risky rewards
Parents, here’s a fun way for your kids to learn why the stock market can be riskier than saving your money in a bank. It will also offer a chance to talk about risk and whether your kids like it or prefer safe bets.
Materials you’ll need:
- Two $1 bills (pretend money works too)
- One $5 bill
- Two dice
STEP 1: Set the stakes
Give your kid one $1 bill and say: “I’m going to give you this dollar bill. What if I told you that if you save that dollar, you could end up with more money! Sound good?”
Here are your options:
- Option A: You can take this dollar and spend it right now. But you’ll only get $1.
- Option B: You can give that dollar back to me to hold on to for now, and in a month, I’ll give you $2.
- Option C: You can give it back to me and I’ll pretend to invest it for a month in the stock market. If you choose this option, you could get $5 or you could get nothing.
Discuss: Ask your child which option they would choose and why. Is it different from the choice you would make?
Step 2: Play the short game
If they choose Option C, grab one die and give it to them.
Tell them to roll the die to find out whether they will earn $5 or get nothing.
If they roll a 1, 2 or 3, they’ll get $5. If they roll a 4, 5 or 6, they lose and get nothing.
If you have multiple kids playing together and several of them select Option C, have each take their turn rolling the die.
Step 3: Raise the stakes
If the kid doesn’t choose Option C, give them the second die (now they’ll have two).
Ask them if they’d change their choice if you told them they had the potential to earn $20 after one month, but they’d have to roll a 2 (a 1 on each die). Would their choice change?
Would they take the risk?
If yes, let them roll the dice. (Of course, you probably should only let them roll the dice if you are also prepared to give them $20 if they do roll a 2).
If they take you up on this, let them roll the dice and see what they get.
Step 4: Explain the game and talk about risk
When it comes to investing, usually when there’s high risk, there’s a smaller chance for a larger reward. Lower risk usually means your reward at the end might be a little smaller, but you are more likely to get that reward.
Putting money in the bank (which is like Option B) will get you a guaranteed amount of money, called interest, while investing in the stock market (Option C) could make you more money, but it’s not guaranteed, and you could lose some or all the money you put in.
There are lots of people who try buy stocks at lower prices, then sell them after they’ve gained value. But because stock prices can go up and down often, there is no sure way to predict them, which is why investing in the stock market can seem a bit like gambling or a game of chance.
But investing in the stock market can be a good long-term strategy — think years or even decades, not months. Even though there will be times when the stock market goes down, even crashes, historically it has always bounced back. That’s why lots of people invest money they are saving for retirement in the stock market.
Discuss: After playing the game, do you think you like or dislike risk?
This may also be an opportunity to tell your kid what you would have chosen and why it is the same or different from their choice. You can also share that many people lose some of their desire to take risks with their money as they get older and closer to retirement.
Extra credit!
- We recommend this “Financially Inclined” episode about what young people need to know before buying stocks, bonds, mutual funds or index funds.
- As investing has become easier and cheaper, more young adults are putting their money into the stock market too.
- You probably think that humans are the ones buying and selling stocks, but computer programs actually do most of the trading nowadays.
Next week: Banks!
If not the stock market, then where? We’ll take a closer look at the institutions where many folks park their money, and set some savings goals for ourselves.