Summary: Understanding personal finance is important for us all at any age. However, most of us do not understand investment well. Is the stock market for kids? At what age should we learn about risk and reward?
The subject of financial literacy is very important for society. It could be argued in part that the financial meltdown of 2008, which stemmed from the sub-prime mortgage disaster in the United States, was caused by a lack of financial understanding from many hundreds of thousands of people.
This might be a problem individually, but clearly when the same problem afflicts hundreds of thousands or millions of people, it also becomes an issue for society at large.
Where does this problem come from?
Many people argue that the lack teaching of basic financial skills in schools is a fundamental issue. Even the US Treasury suggests that learning about finance is something that most of us could benefit from - whatever our age.
However, as this is a website about stock markets and investment, lets look at that aspect.
It would appear that children interested in the stock market ought to be encouraged. After all, if they can start to understand the basics of a stock exchange, it would seem reasonable that they will be able to master less technical aspects of personal finance (for example, most adults cannot balance a checkbook). Some schools use games to help kids better understand the vocabulary or skills of a stock market.
There are certainly many that hope that a good financial education will help that individual to make sound judgements for life about their money.
This is an interesting question and one that, happily, there are potential solutions for.
The workings of compounding means that for a long-term investor, the period of time an investment is being made for is a critical factor (the longer the period of time, the better). If that is so, then starting an investment for a child when they are very young is likely to be a very valuable help for the child.
Such investments might be made to provide a college or university education, the deposit for a first home, pay for a wedding or buy a car, but more time will almost always be a help.
Why?
Simply, the earlier the investment is started, the smaller the total amount of invested capital will likely be required to provide the overall lump-sum. As such, an earlier start is better.
For such long potential timeframes, the stock market may be a great place to save the money into to achieve long-term capital gains. This is exactly the same theory that applies to other long-term investments, such as pension funds and retirement planning.
If you would like to learn more about compounding and the 'time value of money', this (slightly too complicated) page may be of interest.
Therefore, if you found this page wondering whether you ought to invest in the stock market on behalf of your children, the answer is that it might well be a prudent choice. Of course, it needs to be remembered that you ought to take specific advice to ensure that you make the right choices.
If you would like to find out more about the topic of financial literacy for young people, this interview shot in June 2010 may prove to be of interest:
To read more about other related topics, please follow these links:
Are There Really Any Stock Exchange Secrets?
Are Corporate Executives Privvy To Stock Exchange Secrets?
Are Merchant Banks Trading Using Stock Exchange Secrets?
Are Some Stock Exchange Secrets Available To Everyone?
Stock Exchange Information
What Is Insider Trading?
Stock Market Corruption - How Common Is It?
What Do Central Banks Do? Do They Influence Stock Markets?
What Is High Frequency Trading?
What Is After Hours Stock Trading?