InspireFinancialLearning.ca is an initiative of the Ontario Teachers' Federation to provide teachers with effective tools and strategies to help their students navigate the complex world of personal finances.
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When Facebook went public in May 2012, it attracted a lot of media attention. Twitter generated just as much interest with its November 2013 initial public offering (IPO). Why not capitalize on these cool companies going public to spark your child’s interest in investing?
For novice investors, putting money into new IPOs like Twitter (if they could get their hands on any shares) might seem like a great investment strategy. After all, it’s an innovative company with millions of users. But that enormous user growth in a company’s early years may not be sustainable. And just because a company has millions of users doesn’t mean it does or will make money.
Make sure your budding investor does their homework and reads the prospectus from the company issuing the IPO. The prospectus describes the business plan, the company’s growth prospects and important risk factors.
But you’re getting ahead of yourselves! Selecting specific securities is the last step in a well thought-out investment process. It actually starts with your child answering some basic questions:
Once your child knows what they want to achieve and when, they can decide how to get there with a diversified mix of assets such as stocks, bonds and cash. These assets are intended to perform independently of one another; some investments in your portfolio will have gains at times when others will have losses. By mixing different types of investments, you spread out the risk of losing money. Once that asset mix is chosen, then specific securities can be selected.
Your child must be 18 years old to open their own investment account. If they are under 18 and have money to invest, you can open an investment account in trust. But it may be more prudent if their first foray into investing is simulated rather than real!
There are educational websites, such as www.tmx-edu.com/ and www.wallstreetsurvivor.com, that allow you to create mock stock portfolios. Encourage your child to create a portfolio of stocks of companies that interest them, or brands they like. Have them follow their stock price over a period of one, three, six months or longer. How did the company and the stock perform? Calculate the rate of return, how the portfolio performed relative to other comparable investments and how they progressed towards their goal.
Did your child select a diversified mix of assets and securities or did they put all of their play money into one high-flying technology company like Twitter? Whichever route they chose, you may want to discuss the risks of chasing short-term performance in a single investment, versus spreading out the risk to try to grow your money over time. The whole idea is to learn and make mistakes when there is no money at stake. That way, they’ll be prepared when they have actual savings to invest.
