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12 Common Stock Market Terms Explained for Kids

Updated: Dec 3, 2023

As parents and educators, it's our role to prepare our children for the future, and understanding the stock market is a valuable part of that education. But where do you start? The stock market can seem overwhelming with its complex terms and concepts. Don't worry! This guide is designed to help you break down these concepts into simple, kid-friendly explanations. Let's jump on this journey of 'Teaching Kids about the Stock Market' together!


If you're interested, we have a similar title for Bonds titled "10 Key Terms Every Kid Should Know About Bonds!"

 

Table of Contents

 

kids in school


Section 1: Understanding the Basics


Explaining What a Stock Is to Your Child

  • Stock: Help your child understand that a stock represents ownership in a company, similar to how owning a piece of a puzzle is essential to completing the whole picture.

  • Analogy for Kids: Explain that owning a stock is like having a piece of a giant puzzle. Every piece (or stock) is important for the complete picture (the company).

  • You can check out our article "How to Explain Stocks to Kids" for a deeper dive into this subject!


Making Shares Understandable

  • Share: Clarify that a share is a single unit of stock, akin to a building block in a large structure.

  • Analogy for Kids: Describe a share as one seat in a big stadium. If they own a share, it's like having a ticket to that seat in the company's stadium.


Simplifying the Concept of the Market

  • Market: The stock market is where people buy and sell stocks, similar to a marketplace for goods.

  • Analogy for Kids: Compare the stock market to a giant farmers’ market, but instead of selling fruits and vegetables, it's for stocks of different companies.



wall street sign


Section 2: How the Market Works


Teaching About Exchanges

  • Exchange: An exchange is where stocks are bought and sold, like a marketplace specifically for stocks.

  • Analogy for Kids: You can liken an exchange to a busy fish market, with continuous buying and selling activity, but with stocks instead of fish.


Portfolio: Your Child’s Collection of Stocks

  • Portfolio: A portfolio is a collection of various stocks owned by an individual.

  • Analogy for Kids: Compare a stock portfolio to a personal library with a variety of books, each representing a different stock.


Understanding Dividends

  • Dividend: Explain that dividends are rewards given to shareholders, similar to earning a little extra for good work.

  • Analogy for Kids: Use the example of a lemonade stand sharing extra profits with your child for their role in the business.



planting seeds

Section 3: Stock Market Actions


Buying Stocks

  • Buy: Teach your child that buying stocks is an investment in a part of a company.

  • Analogy for Kids: Compare buying stocks to planting seeds in a garden, which grow over time.


Selling Stocks

  • Sell: Selling stocks means converting shares back into money, often done when the time is right or when funds are needed.

  • Analogy for Kids: Liken selling stocks to selling an old, valuable toy when it's time to move on or when there's a need for money.


The Concept of Trading

  • Trade: Trading involves the buying and selling of stocks.

  • Analogy for Kids: Compare trading stocks to swapping stickers, aiming to get more valuable ones in return.



big bull

Section 4: Understanding Market Movements


Bull Market

  • Bull Market: A bull market indicates rising stock prices.

  • Analogies for Kids: Think about a big bull throwing its horns and head up in the sky! If you were going to trace along the top of the bulls body, there would be a big upward line!

  • You can check out our article "How to Explain Bull Markets to Kids" for a more in-depth look at this subject.

Bear Markets

  • Bear Market: A bear market indicates falling stock prices.

  • Analogies for Kids: Think about a bear walking around sniffing the ground. It's head is down below its shoulders and back. If you draw a line from its tail to its nose, that line would end below where it started!

  • Take a look at our article "How to Explain Bear Markets to Kids" to learn more!



upward trending graph

Section 5: Advanced Terms Made Simple


Explaining Stock Market Index to Kids

  • Index - Detailed Description: A stock market index is a tool used to measure and report the performance of a specific segment of the stock market. It's like a summary of how well certain stocks are doing. There are different indexes, and each tracks a different group of stocks. For example, the Dow Jones Industrial Average tracks 30 large, publicly-owned companies in the U.S., while the S&P 500 tracks 500 of the largest companies. These indexes give an overall picture of the stock market's health and are used by investors to gauge market trends.

  • Detailed Analogy for Kids: Think of a stock market index like a class report card that shows how students (stocks) in a class (the stock market) are performing. Just like a report card summarizes the grades of all students in various subjects, the stock market index summarizes the performance of various stocks in the market. If the index goes up, it's like the class average grade improving, showing that the stocks, on average, are doing well. If it goes down, it's like the class average dropping, indicating that the stocks aren't performing as well.




Conclusion: Empowering Young Minds with Financial Knowledge

As we wrap up our journey through these key stock market terms, remember that this is just the beginning of a fascinating and valuable learning experience for your child. Financial literacy is an essential skill, and introducing your kids to the stock market is a significant step in that direction. By breaking down complex concepts into manageable and relatable pieces, you are laying the foundation for their future financial savvy.


Encourage your child's questions and curiosities as they explore these concepts. Each question they ask is an opportunity to deepen their understanding and your own. Remember, learning about the stock market isn't just about understanding money and investments; it's about nurturing critical thinking, decision-making skills, and a sense of responsibility.


In today's world, where financial knowledge is as important as ever, empowering your child with these skills is a priceless gift. So, continue the conversation, explore resources together, and perhaps even start a small investment project with your child. This hands-on approach will not only solidify their understanding but also strengthen your bond as you learn and grow together.



Additional Resources for Parents

Don't stop here! There are numerous resources available to help you in 'Teaching Kids about the Stock Market.' From educational apps and books to online courses and games, the tools at your disposal are both fun and educational. These resources can make a significant difference in how your child perceives and understands financial matters.


If you think stocks are a little too advanced to start with, you might consider learning to budget with your kids first! Check out our article on budgeting as a precursor to teaching kids to invest in stocks!



Call to Action: Engage with Your Child

Begin a dialogue with your child about the stock market. Use everyday opportunities to discuss financial concepts, and relate them to the stock market when appropriate. Your engagement in their financial education will encourage a lifelong interest and understanding of these crucial concepts. Together, you can navigate the exciting world of finance and investing. Happy teaching and learning!



 

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