How to Teach Kids About the Stock Market

Money management lessons learned at a young age can translate into a lifetime of financial success. As a responsible adult, you may take special pride in teaching youngsters about the stock market. To do so, you must first introduce kids to the concept of the corporation. From there, you can set up a United Gifts or United Trust to Minors Act account (UGMA / UTMA) to teach kids about the stock market through hands-on experience.

The Corporation

Corporations sell shares of stock to raise cash to finance their operations. In exchange, investors receive ownership stakes within the business. The value of these shares, or ownership stakes, fluctuates alongside corporate earnings. You and your child will trade shares of stock through a broker, who provides access to major stock exchanges. In terms of trading, the stock market operates as a large auction. For each stock, trades clear at points where the highest bid and lowest asking prices intersect.

UGMA / UTMA Accounts

You can set up a UGMA / UTMA account to trade stocks on behalf of a child, until he reaches the age of majority. The age of majority may occur at either 18 or 21, according to state law. At that point, the young adult will assume full control of the money.

As the adult custodian of the UGMA / UTMA, you will be responsible for putting money into the account and executing trades. This means that the minor may hand over cash to you and provide trading instructions before you can complete transactions on his behalf. By law, any withdrawals made from the UGMA / UTMA must be spent for the benefit of the child. Each month, you and your youngster can review brokerage statements to track growth of the UGMA / UTMA account.

Saving for College

UGMA / UTMA accounts are ideal college savings vehicles. At any time, friends and relatives can make irrevocable gifts into the UGMA / UTMA to help meet future college expenses. These college savings will be tax efficient, because gains will be taxed at the minor's lower tax bracket upon withdrawal. Again, be advised that the minor assumes full control of UGMA / UTMA funds when he reaches the age of majority. You and your relatives may be disappointed -- if the young adult chooses to forgo college and spend the UGMA / UTMA funds elsewhere.

Dividend Reinvestment Plans (DRIPs)

Through a dividend reinvestment plan (DRIP), you can buy shares of stock directly from a corporation. DRIP plans are ideal for smaller, beginning investors, because they bypass expensive brokerage commissions and allow you to build investment positions for as little as $50 each month. When setting up a UGMA / UTMA through a DRIP, your youngster can feel a sense of pride in taking ownership over his favorite corporations. McDonald's, Coca-Cola, Disney, and Nike are all popular corporations with youngsters that also provide DRIPs. For dividend reinvestment plan enrollment information, you may contact a corporation's investor relations department or visit www.computershare.com.

How to Teach Kids About the Stock Market, Sources:

Securities and Exchange Commissions: Direct Investment Plans

FinAid: UGMA & UTMA Custodial Accounts

IRS: Corporations

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