Teaching Your Child How To Invest

NEW YORK (MarketWatch) -- Is your kid curious about the stock market? With encouragement, your budding Warren Buffett can learn the ABCs of investing and perhaps earn a little pocket money.

Most kids who are keen on the stock market get their inspiration from investment-minded parents. To be soundly schooled in the market, it is best for your children to invest real money -- yours or theirs. It's hard to capture a kid's imagination with hypothetical stock picks.

Investing can be fun when kids buy into companies they know, such as fast-food chains or computer makers. You can also tap your youngster's enthusiasm by suggesting they choose to follow stocks of highly visible firms in your hometown. Of course, investing real money means real money may be lost.

With some exceptions, children are better off investing in individual stocks rather than a mutual fund. Funds offer diversification, but they are not necessarily well suited to teaching your kids about the market. With stock, children are introduced to the idea of owning a piece of a known company that they can follow. This can spark a lasting interest in finance that will hold them in good stead later in life.

Be aware that minors generally aren't allowed to have investments in their own name. This means you will have to find a way to hold it for them. There are a few ways to do this, including opening a custodial account, a joint account, or simply keeping the investments in your personal account.

The third option may be the best, according to MSN Money Columnist Liz Pulliam Weston. Otherwise your child's assets could limit the amount of financial aid he or she is offered when it comes time for college. Weston also recommends buying shares through an online broker, to avoid the hefty fees brick-and-mortar brokerage firms often charge.

By Marshall Loeb