Teaching Kids About Investing: Giving Shares of Stock

Over Christmas, I got to thinking about one of the neatest gifts I ever got: When I was 8, my mom bought me some shares of Proctor & Gamble stock. She explained that I now owned a piece of the company.

Of course, as an 8-year-old, I had never heard of Proctor & Gamble. So my mom took me around the house showing me all the products we regularly bought that were made by P&G: Tide laundry detergent, Charmin toilet paper, Bounty paper towels, etc.

Then, she took me along on the next grocery run and showed me the same thing. I was amazed. Not only did this company make a nearly-unending list of famous cleaning products, they made Pringles potato chips. Every kid in my class loved Pringles potato chips!

And now I owned a portion of this company. Boy that was cool!

Focus on the Profits (not the Price)

Over the next few years, my mom made a point to maximize the educational potential of the gift.

My mom explained that, as a shareholder, I could choose between receiving money for my share of the business’s profits, or I could use that money to automatically buy more shares of the business–thereby allowing me to earn even more profits in the future. That sounded like a good plan to me!

She never even mentioned the market value of the stock. In fact, I didn’t realize until years later that the stock could be sold. The entire focus was on owning a company in order to receive a share of its profits. There was no mention whatsoever of the lottery of short-term stock price movements.

Every time there was a shareholder vote for new board members or important company policies, my mom explained everything to me so that I could choose what I thought would be best. (I distinctly remember voting against testing products on animals.)

My mom did everything she could to make the lesson as concrete as possible: When you buy a stock, you become a business owner, and you earn a share of the business’s profits for as long as the business is around. I was hooked. I wanted to know more, and I wanted to build my collection of businesses.

Why Not Give a Mutual Fund?

I’m as convinced as anyone regarding the benefits of index funds, but I’m of the opinion that a share of an individual stock (and a lot of time spent teaching) makes a superior educational gift for a young child. It’s far more concrete and, therefore, easier to understand and easier to get excited about.

Lessons such as diversification, minimizing costs, and so on can come later, after the child is interested in investing.