In India if you crossed the age of 18 then you are old enough to vote. However, most parents do not consider their children old enough to trade stock markets once they have reached the age of 18. In fact, once you cross 18 years of age you can legally open your trading account because you are competent to enter into a contract. While trading may have its inherent risks, it is important to introduce your children into the world of trading and investing at an early age. It not only teaches them the value of money but also trains them in thinking long term. Above all, it reinforces in them at an early age that returns are always proportionate to the risk you are willing to take and the risks you are able to effectively manage. Here is a 12 point plan of how you should introduce your child into trading once they cross the legal age of 18..
12 things to teach your child about trading once they cross the age of 18..
You obviously do not want your child to become a full-time punter in the stock markets and that is understandable. But that is not what trading is all about. It is a great interplay of risks, returns, circumstances and prudence. Here is how you should be guiding your child into trading at the age of 18..
1. Show them the difference between saving and investing. When you put your money in a bank account you are surely saving money. But then you are not making the money work hard enough for you. They need to learn early that only by converting these savings into investments they can create wealth and meet their life goals.
2. Let them learn the power of equities at an early age. When you are starting out in life, you need to know; what is good risk and what is bad risk. Investing in good equities is an example of good risk. Show them with examples of real stocks how equities have created wealth over a longer period of time.
3. The risk of not taking risk is greater than the risk of taking risk. This may sound paradoxical but it is actually true. Majority of the individuals fail to create wealth because they never took on sufficient risks. Only a small portion of people fail to create wealth because they took on the wrong risks.
4. Let them learn that stocks represent ownership in a company. When you buy shares and take delivery into your demat account, you actually become part owner of the company. It may be very small but the very fact that they can become part owners of a large company with a small investment is enough to trigger their interest in equities.
5. Let them understand the index rather than the just watching the index. It may be exciting to watch the gyrations of the Sensex and Nifty with analysts and journalists breaking sweat over it. That actually means nothing. Let them understand how the index is constituted, how performance s benchmarked and let them also learn the power of passive investing.
6. Teach them the power of ROI. Whether you are trading or investing it all boils down to your return on investment. If your trading corpus is Rs.100,000 and at the end of the year your net profit is Rs.17,000/- after considering all costs then your ROI is 17%. Profits and losses on individual trades really do not matter.
7. They must understand the power of compounding and the need to start early. Use this simple example on how money grows when it is doubled at each step..
DetailsStep 1Step 2Step 3Step 4Step 5Step 6Step 7Step 8Step 91 lakh2 lakh4 lakh8 lakh16 lakh32 lakh64 lakh1.28 cr2.56 cr5.12 cr
A typical bond will pay around 8% interest. So it will take 9 years to double. In the above case, the 9 steps will take 81 years which is out of bounds. Instead if you invest in equity funds giving 18% returns then you can traverse this journey in 35 years. That is the power of compounding which is the core of trading and investing.
8. Teach them the power of frugality. To create wealth and to be successful traders they need to be paranoid about reducing costs. These costs like brokerage costs, statutory costs, illiquidity costs, taxation costs etc will sweep away a big chunk of their returns. They need to bargain to the last paisa.
9. Trading is all about managing risk and this will also help them to manage risks in all walks of life. Be it risks in their education or risks in their career, risks have to be managed. Essentially, managing risks in trading is all about understanding the risks, putting a limit to risk and operating with a Plan-B. Interestingly, that is the way risks have to be managed at all times.
10. Occasionally they will fail; in fact they will fail more often as traders than succeed. What they need to be told is that when they are right they have to make the best of it and when they are wrong they must only be briefly wrong. That way, the larger probability of losses or failures can be easily handled.
11. Teach them to treat trading dispassionately and purely based on data and facts. Trading has no place for your emotions. What the market tells you is more important than what you feel or what you believe. Falling in love with a particular stock or falling in love with your trades is a recipe for bad performance.
12. Humility means that you don’t know what you don’t know. Sounds strange; but that is the truth about markets! The markets have the uncanny ability to surprise you. Once you are able to acknowledge that there are a lot of things you do not know it is easier to learn. That is the core of trading and investing.