My father’s voice is in my head this week, probably because my birthday is just days away.

My last post was on teaching teens about calculating simple and compound interest–one of the money lessons I learned from him. So this morning when the alarm went off, that fast-becoming-annoying voice in my head said: What about stock dividends? Did you forget? Get up and teach them about dividends. How can you just leave them hanging with interest rates?

If you didn’t grow up with a mathematician for a parent, let me assure you that my childhood was every bit as weird as you’re thinking it was.

When my father first taught me what a stock was, he made sure to tell me he loved to invest in companies that paid dividends.

Here’s what a dividend is: It’s a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. It can be paid in dollar amounts, or in the form of additional shares of stock. Conceptually, it’s essentially the interest you earn for being a part owner–shareholder–of the company, for trusting them enough to invest in them.

Not all public companies offer dividends. Some simply offer a capital gain (hey, Dad, I didn’t forget capital gain in the dividend lesson!), which is what that stock ticker price is all about. When you see that, say, IBM is at $120 today, that means that’s the street price for one share of its stock. The capital gain is how much you make when you sell the stock. So, if you bought IBM at $80, your capital gain would be $40 if you sold it when it was worth $120.

Capital loss is when you buy IBM at $120 and sell it for $80. Tell your kids that, in a nutshell, too many capital losses is what most adults have been moaning about for the last year.

Why do some companies pay dividends and some don’t? Mature, low risk companies pay dividends. It’s their way of telling shareholders they’re solvent and safe. Newer, high-growth companies generally do not.

Discussion Question for you and your teen
That doesn’t really explain why Apple, for instance, doesn’t pay dividends. Yes, it’s a high-growth company, but it’s also stable enough to pay dividends, and in fact it used to. This begs a good discussion question with your teens, once they understand the concept of a dividend:

Does Apple now refuse to pay dividends because they’re cheap, or because the company philosophy is to reinvest earnings in the company for maximum innovation? What happened in the marketplace to make them feel pressure to start reinvesting all of their earnings? Did it have anything to do with Microsoft?

My father invested 80% of his investment money in dividend paying companies, and only 20% in non-dividend paying stocks. That tells you something about our parents’ generation. Today, most people have the opposite ratio.

He invested 20% in non-dividend companies because he believed in innovators, and companies struggling to grow. And as an entrepreneur himself, he knew how important it is to put all the company earnings back into the company while it’s growing.

And that’s essentially the difference between a dividend paying and non-dividend paying company: newness, growth, how much capital they need to continue to grow given their competition. It is correct to assume that non-dividend paying companies are a riskier investment than dividend paying ones.

Another Discussion Question
Ask your teens which they think they’d prefer: Investing in a dividend-paying or non-dividend paying stock? Show them some examples. Hint: for dividend-payers, look at blue-chip stocks. I’d love to hear their opinions.

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Nathan Hodgens not only learned how to invest in the stock market with help from his mother, but from his younger, 14-year-old investor brother Ryan.

This summer, once Nathan got the stock market under his skin, too, he started doing his homework and investing.

“The first thing I bought was two shares of Wal-Mart, both at $48.49 and I still have them today,” Nathan said. “I specifically chose Wal-Mart because not only is it a company that will grow over time, but a company that is socially responsible because of its urge to go green.”

Hodgens explained that Wal-Mart is in the process of making a label similar to the nutrition label on food, which lets buyers know how the environment was affected by the manufacturing of a product. The company is using compact fluorescent bulbs and putting doors on their refrigerated areas.

“Doing things like this makes me want to invest in them,” Hodgens said, adding that eventually he wants to invest in other green companies, and characterizing himself as a long-term investor. “Solar, ocean energy, wind, as well as companies that I believe are making a difference, like Wal-Mart.”

Investing in what he believes in gives Nathan patience and focus, something most adult investors could use. In fact, Nathan seems to have patience with all aspects of stock investing, including missed opportunities.

“I had thought about buying PSUN or PacSun, a local company in California, then got lazy and did
not invest and within three weeks, it had gone from $1.67 a share to $4.44 a share, and I was going to invest about $500 into it,” Nathan explained. “There goes some easy gas money. But again, you can not predict the stock market.”

Nathan’s parents started him on his investing path when he first started making money from a paper route, They put some of his earnings into mutual funds, specifically the Vanguard 500 Index, a well rounded fund that reflects the the market itself, much like the S&P 500. Nathan learned early the lesson of things being unpredictable. Showing teens an overall snapshot at the outset, including fluctuations, can certainly be valuable, so their expectations don’t get too high.

Nathan has certainly learned about fluctuations by being an investor this year.

“Recently when me and my mom went onto Vanguard to check how my mutual funds were doing, I realized just how bad the economy was, as my money had dropped about 25 percent! And this was around the time that I was buying a car,” Nathan said.

The motivating factor for Nathan getting involved in the stock market was something that drives a lot of teenagers:

“Mainly the fact that I need money for gas in my car, and thought that over time if I put some money in the stock market, it might help pay for repairs, etcetera, later.”

Very practical.

Today Nathan still owns Wal-Mart and even more shares of the Vanguard 500 mutual fund. He invests for the long term and sticks with solid companies, two very important habits. Another habit is knowing that you don’t earn your salary from the stock market, you put a portion of your salary into the market to earn interest.

Since his paper route job, Nathan has taken on other work as well.

“I earn extra money doing yard work for my neighbor. He pays $15/hour!,” Nathan said. “I also referee soccer during the season, which is 10 weeks long.  I can earn anywhere from $13 to $20 per game and I like to ref 4 - 6 games a weekend.”

Going forward, Nathan wants to invest in green companies deal in solar power, ocean energy, and wind, as well as other companies that he believes are making a difference, like Wal-Mart. And he’ll keep his attitude.

“I feel that I go for more the low risk kinds of stocks, and do a ton of research on the ones that I believe I might be buying into,” he said, adding that he has no intention of making a living stock trading.

His career goals right now do have to do with the economy, however.

“I would much rather try to control some of the economy and stocks by going into government and working towards making our economy better, making third-world countries’ economies better, as well as getting our country less in debt.”

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(Naresh with President Obama, both volunteering at the Houston Astrodome in 2005 after Hurricane Katrina)

Naresh is not your average junior. He has been investing in the stock market for one year, since he was 19. He got his seed money from his father, as a birthday present. Before that, Naresh never accepted birthday presents.

“I celebrated my birthday when I was in the 5th grade,” Naresh said. “I’m turning 21 very soon. Instead of throwing a big birthday bash, I’ll just sit back and take in life as is. Presents are material possessions I’m not very interested in. I’m a pretty simple person, and I’ve always been one.”

Very mature—more mature than I’ll ever be—but even more than mature is the curious nature of his statement, given that his passion is investing in the stock market. If not money, what is Naresh interested in?

The game, the challenge, the movement, the mechanics. And politics.

“I took an economics class in high school. We played a stock market game and learned several ratios and ways to research companies. The introduction got me very interested in the stock market,” Naresh said.

He’s very studious. Since that high school eye opener, he’s been listening to guys like Peter Schiff. “And former guys at TheStreet, James Altucher and Frank Curzio, have given some great advice. My bosses, current and former, Daniel “The MoneyMan” Frishberg of BizRadio, Mike Norman of Pitbull Economics, and Dan Cofall of Noram Capital Holdings have had the biggest influences,” Naresh said, rattling off his sources.

Do any stand out as the biggest influence?

“This is still premature, but my finance advisor, mentor and professor at school, Dr. Fernando Diz, will likely be the biggest influence in the shaping of my worldview,” Naresh said.

Good thing he knows that at age 20, calling a most profound influence could still be premature. But maybe not. That’s what so important about a financial education early on. Most of our inspiration and influences are locked in by age 21.

“The biggest lesson I’ve learned in the market is never to look back,” Naresh said. “It’s like that ex-girlfriend you broke up with. You make decisions and move on. Otherwise you’ll always be thinking ‘what if?’ and find yourself in misery.”

Sounds like Naresh may have gotten burned a time or two when he started out loving the adrenaline rush of the stock market. At first he invested on a daily basis.

“I bought Aflac, Microsoft, Apple and Ebay on my first day because they were near their 52 week lows,” Naresh said. “I sold them the next day and made more than $500 by 11 am.”

Easy to see how he’d get hooked on day trading. Naresh admitted that his short-term victories didn’t last, even though he was shy about those details.

“I quickly learned, as a beginner, that is not the best way to trade,” Naresh said. “At this time, I’m concentrating on the longer holds, six to eight-month intervals. I have developed the patience and discipline to buy and hold and not look at the markets on a daily basis.”

Interesting that to a 20-year-old eight months for an investment is a long time. Everything is relative, and for his age and risk tolerance, it makes sense. Still, instilling longer term thinking as he goes forward will important, something his trusted advisors are probably watching closely.

It turns out that Naresh himself is thinking about it. He is certainly thinking about his long term future.
“I’m now part of an elite group at Syracuse University called the Orange Value Fund,” Naresh said. “Approximately 10 students are selected. We take MBA-level finance classes and learn the philosophies of bottom-up, value investing. The research reports we’ll be doing will be integral to my own investment methods.”

In addition to being a full-time student, Naresh works in the financial media industry as a producer of two financial talk shows for CNN Radio in Dallas/Fort Worth. B

“Being in this business for more than a year, I developed a grasp of the economy and financial markets. I thought the beginning of this year was a great time to enter the market since everything was so cheap. I had also taken several economics and accounting classes throughout high school and early in college, so I had a basic understanding of things,” Naresh explained.

Naresh emphasizes that teens get started in high school, to learn the financial markets. And anyone can keep up with Naresh on Twitter as he looks forward to October.

“I think October will be a great time to buy individual stocks, after the Third Quarter earnings come out. As a result, for short-term trading, SKF (Ultra Short Financial) is a good pick,” he said.
Hmm. He still likes those quick buys.

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I was just at a back-to-school Board meeting, where I suggested that we add something to the curriculum: teaching the high school kids about the stock market.

You should have seen the looks I got. Stares. No reply for a while. And these are intelligent people, each one successful, making enough money to send their kids to private school. Then someone laughed.

“That’s all we need. To be sued when underage kids start day trading.”

I knew that most adults have a fearful, adversarial relationship with money, even if they’re successful earners. If they do invest, many trust their brokers or financial planners with all the decision making. What I didn’t predict is that they’d rather raise their kids with the same fears and anxieties, rather than risk helping them.

Now, I don’t think this is intentional. I think it’s a deep emotional disposition, conditioned by our society. So, of course I started busily outlining how the lesson plan would work, how it would fit nicely as a special, experimental curriculum addendum to either math or social studies, depending on scheduling preferences of the faculty, for the spring semester, 2010. And I volunteered to be the guest teacher.

I’m not all that good at taking no for an answer.

Here’s the approach and rationale: First, the lesson will include the fundamental of buying stocks (see Teach Teens What Stocks Are and Mutual Funds Give Teens a Feel for the Market posts.)

But then comes the really deep part of the lesson: Are you someone who should invest in the market at all? What is your investor personality?

If people wait until they’re adults to ask these questions, it’s too late. The fearful, distant, dysfunctional relationship with money has already sunk in. It’s like waiting until you’re 25 to have your first kiss. Picture the implications of that one.

The most important part of the lesson addresses the fear that surfaced immediately from that Board member: That they’ll become gamblers. So the disposition of the classroom lesson should be that despite the post-modern philosophy that everyone should be a stock investor, it’s not true. Some people should not.

Now, in most cases, this class will never be taught in high school. I’ll keep you posted about whether they actually let me do this at the very progressive school where I’m on the executive committee of the Board.
And that brings me to the point. You’re the one who has to teach your kids about investing, even if you don’t know a thing. It’s up to parents, just like explaining that butterfly in the stomach feeling after your first kiss.

You answer the teen questions about love: How did you and Dad first meet, how did you know you were in love, how many boyfriends did you have before you got married? (My husband claims I give a different answer every time.)

These are much tougher emotional questions than which companies to invest in to start a good life savings program, and how to have a healthy relationship with money and earning so you’re not broke and stressed out by the time you’re 40.

If you think about it, nothing causes more stress in adult lives than money, so why would we even trust these lessons to institutions like school? Investing money is all about what your personality is like. Do you like risk? Are you obsessive? Are you too laid back? Who knows your kid as well as you do? No one.

You must bring the “should you be a stock market investor?” lesson home. Here are some suggestions about how to find out your teen’s investor personality, after you’ve explained the fundamentals—using our previous posts, as well as the resource links below. And remember, if they don’t want to invest in stocks, the investor personality questionnaire can lead the way to you helping them decide what they should invest in, given their dispositions.

This, of course, isn’t an absolute determination, just a guideline. The important thing is to have a structure for the dialogue you’ll have with your teen. When I’ve tried this questionnaire with teens and college students, they often tell me what their investor personality is, and ask to be taught about specific investments. One teen said to me:

“I’ll obsess if I invest in individual companies. Aren’t mutual funds a bunch of companies, and less up and down in price?”

Great question, and I immediately focused on mutual funds in this teen’s area of interest: greentech.
There are some side benefits of teaching your teens about their investor personality: What they learn can help teens with a lot of other things in their lives: school, dating, jobs, depression, angst. Analyzing how to approach money in a healthy way can be a great lens into general problem solving.

The Stock Market Personality Questionnaire:

If they’re 13, they’re ready to start. Sit down with your teen and make a personality profile, answering these questions:

• How much money would you like to earn by the time you’re 25?
• Are you easily stressed?
• Are you an overachiever?
• Are you obsessive if you don’t get something right?
• Are you high strung or laid back?
• How many extracurricular activities do you participate in—none, two or less, three or more?
• Do you play sports?
• How competitive are you?
• What sort of student are you? Straight As, As and Bs, Cs?
• What is your favorite subject?
• Are you well rounded in your interests—some sports, time with friends, time doing nothing.
• What is your favorite hobby?
• How much do-nothing time do you have each day?

Do the personality profile questionnaire yourself, especially if you fear investing. Your teen will feel more comfortable answering these questions if you answer them, too. Answer the ones about high school by remembering what you were like in high school. Your teen will love this part.

Okay, when you have your answers: If your kid is high strung and overachieving—busy every waking hour, expects to make a $1 million by age 25, driving all over the continent on Saturdays to play different sports—it may be a huge miscalculation to assume he or she would be a stock investor that doesn’t get stressed. They may be very good at it, but they should be aware that it could cause them stress, especially if money is really important to them.

What’s fun is that the kinda lazy, dreamy kid of yours at home—the one snoring at noon on Saturday instead of playing on three different sports teams and belonging to six different school clubs? You may have a sleeping giant on your hands. You may worry that they will never amount to anything, but with some training these personality types are sometimes great money minds.

Being relaxed without too great a sense of urgency is a definite plus in investing. And the ones who let themselves be kids, not in too much of a hurry, tend to think long term. They tend to have patience with money matters, too—perhaps the single most elusive quality for any of us.

And guess what: long-term investing theories make for the healthiest relationship with money. In fact, long term thinker and well rounded kids are arguably the best investor profile, according to studies done by the Jump$tart Coaltion, a non-profit organization devoted to teaching kids about money.

Try to teach all teens about the soundness of long term investing, and if that doesn’t appeal to them at all, then steer those teens away from stocks altogether—bonds, mutual funds and CDs (are all good options.
Show your teens the following two profiles:

This one is of a kid who should never invest in the market: Addictive Gambling Personality: Bad Boy Cole Bartiromo.

For comparison, here’s a stellar kid personality for investing, Damon, The Golden Boy of Stock Buying.

Ask what they think of these profiles, and where they think they fall on the investor spectrum.
Once you’ve decided what sort of investor personality your teen has (and you, too!), then steer them in the right direction, get them started learning what to invest in. Here are some resources:

• Jump$tart Coalition - A non-profit organization devoted to educating kids. A great resource for parents who don’t have a savvy relationship with money.
• Sharebuilder - Custodian stock trading accounts are available here, so parents can start teens investing with a watchful eye.
• Financial Planning Association
• MoneyTrack - PBS’ website for money management shows.

The overall lesson here is to find a relationship with money that is tailored to you. If that expectation starts in teenhood, it will last a lifetime.

Stay tuned. Soon I will post profiles of teenage investors who have done quite well. We’ll see what they read, what their online sources have been, what role their parents played in their stock market education and trading process. You’ll see that many of them do not have money savvy parents, but those parents helped anyway.

Please share any stock training stories you have.

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I will soon do a post on teaching teens about mutual funds in general, but I firmly believe in teaching investment vehicles in a certain order. I know it sounds strange to talk about a specific example of a mutual fund before you give a general definition, but in this case—where teens are the audience—the information should be cumulative.

So the order should be, first teach stocks, then municipal bonds, then municipal bond funds. Then expand out to general mutual funds, where all the lessons they have learned so far will gel, because mutual funds contain both stocks and bonds.

Stay with the local angle to teach about bond funds and make the primer lesson about municipal bond funds. They really will maintain better interest. Also, municipal bond funds are on the safer side, and better to teach safest first.

So here are the 3 steps:

1. First, a definition: A municipal bond fund is a type of mutual fund. Essentially, it’s a collection of municipal bonds that an investment specialist manages. More than one person buys into a bond fund. So the investment specialist pools money from different people, then buys and sells bonds, depending on their value, keeping a set arsenal of them at all times.

Municipal bond funds tend to have lower returns (less interest to be earned), but are also lower risk and come with tax advantages. Lower risk means the bonds are issued by localities that are established, with low debt and a good track record, and often pay dividends. (In a more advanced investing post, I will go into choosing stocks and bonds on the basis of good dividends, because it’s a barometer of a stable company or municipality.) For the risk averse, municipal bond funds are a good diversified investment.

2. Have your teen go to municipalbonds.com and choose two municipal bond funds to track. Make them both local. Have them chart differences of return on investment over the past 10 years. See if they can find out why one is performing better than the other.

3. Then have them search on best performing funds in the state and compare it to another state municipal bond fund. Have them choose a state they dream of going to college in, or just like for some reason.

My favorite thing about teaching municipal bond funds is that kids get a very broad education about how their local and state governments manage money. It may spark interest in local politics and news. Kids tend to be loyal, so the comparison to another state will pique their interest. They’ll want their state to be better.

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When it comes to investing in bonds, I like teaching kids by going straight to municipal bonds. It’s like the way elementary school teachers teach kids social studies: They start in Kindergarten with the immediate community—here’s the school, the fire department, the grocery store, the police station, the post office. Then they expand out to differentiating between rural versus urban, then states, then countries. They do this for a reason, which is that kids retain information that they can relate to. Your teen or college student is the developmental equivalent of an elementary financial student.

As a college professor, when I want to explain how the economy works, I make my students write an article about the financial health of the university. Because it’s a state school, it’s a microcosm, and they learn so much faster than if I try to explain concepts in a large sense.

Bonds are very similar. Once they grasp the definition, they’ll like the local advantages of a municipal bond, plus they may even learn a thing or two about why the local government needs to borrow money, and what it’s being used for. They’ll love the fact that they are the creditor in the situation.

Learning about municipal bonds is a good follow up investment lesson to the stock primer, because like stocks, municipal bonds are also securities.

Here’s the step by step primer on bonds for teens:

1. Give them a gerneral definition that spells out the difference between a stock and a bond: Any bond is essentially an I.O.U. It’s a formal contract between the issuer/borrower (for municipal bonds the city or state government is the borrower) and the bond holder (you, the bond purchaser/lender), to repay the borrowed money with interest at fixed intervals.

While both stocks and bonds are equities, the main difference is a stockholder has a stake in a company (one of the owners), whereas a bondholder is a creditor who has lent a government money and expects to be paid back with interest. The interest is called a coupon—which comes from the old days, when actual paper was issued for a bond, and coupons were attached. On coupon dates, the bond holder would bring the coupon to the bank and trade it in for the interest payment.

Bonds have a long maturity cycle, up to 30 years, another difference from stocks. (Really short-term bonds, usually a year, are called Treasury Bills, or T Bills for short, and mid-range bonds are called Notes. I’ll do a separate blog on those.) Learning a long term investment vehicle, right after learning about stocks, which can be bought and sold every nanosecond, can help teens understand the spectrum of choices, and why you want both in a portfolio.

Municipal bond interest is exempt from Federal taxes, and in some cases from state taxes. You need to live in the state where the bond issuer is in order to get a state level tax break.

2. Have them choose four municipal bonds to compare for performance, each from a different state. Make at least one of them local. But also make at least one of them from another state. Have them make a chart. They can go to muncipalbonds.com, where there’s a state by state search to choose bonds.

3. Point out the tax benefits of the local municipal bond fund.

4. Have them research what each municipal issuer is using the bond money for. See if they can even find out! They’ll get nice and worked up about it if they can’t. It’s essential that they understand governments issue bonds in order to raise money for projects that should benefit the community. Buying your own state’s municipal bonds is the act locally part of the groovy world view. You’re investing in the upkeep of where you live.

By comparing different municipalities and their performance, kids will understand that not all local governments are run equally, and they vary greatly in wealth.

5. Tell them how municipal bonds are bought—either through an onsite investment advisor at your bank or credit union, or through a brokerage house. If possible, bring your teen to visit the investment advisor at your local financial institution, and have them analyze the four municipal bonds your kid has chosen to compare.

Make sure your kid asks the investment advisor what the dangers of bonds are. It’s always interesting to hear the answer. Essentially, bonds are safe, but nowadays people worry about municipalities in certain states going bankrupt. Still, they are safe, which is why there’s an inverse relationship between bonds and the stock market: When the stock market goes down, the average price for a bond rises, indicating greater demand for them.

6. Bonds can be an expensive buy in, but if you have a 529 college fund set up for your teen, you can make an investment in a municipal bond within that account. It will make your kid much more interested in that account, and what it means.

Please share your thoughts about buying bonds, and which bonds are your favorites.

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The inspiration for this post was a college student who became my intern. I asked her to find the ticker symbol for a company we were researching. She had no idea what I meant, and was too embarrassed to ask. With Google giving her the world at her fingertips, I didn’t understand why she didn’t just go find out, save herself the embarrassment. I was curious about the psychology of the problem, so I let it stew for a while. I definitely thought she was right to be embarrassed. She’s 20 years old. She’s heard the term by accident on TV a million times.

I finally confronted her and she said: “You can’t just Google something financial, can you?”

She’s a bright girl. It may not seem like it, but she is. Hey, at least she knew it was something financial. So, then I understood. The stock market, which, let’s face it, is a group hallucination in many respects, is intimidating to most young people. Once I demystified it for her, and then sent her to this great Virtual Stock Exchange web site to play, she transformed. Now she’s a day trader gamer—which was so not the point of my lesson. But we’ll get her there. She’s comfortable with it now, and is starting to really learn how to invest.

The following tutorial for your teens about what stocks are, how to buy them, and when not to buy them, is taken from my intern’s journey. It’s simple, 5 steps. There is a more advanced lesson I will write in another blog post, but this is specifically a primer for teens, or 20-year old newbies, with three goals: Teaching them what stock is, how to buy it, and who they are as budding investors.

The reason I emphasize teaching teens, and not waiting until they’re college students, is my intern said she would have understood her political science class so much more if she had understood the stock market beforehand. I think I’d like that quote etched in my tombstone! My raison d’etre, achieved.

But it is with a huge warning label that I write this post. I do not believe that every human being is designed to invest in the stock market. This primer is designed to ferret that out. My husband, for example, is not. I tend to make long-term investments, and think of stocks in seven-year cycles, sort of like real estate. He says he understands this concept, but if he’s aware of an equity that’s been purchased, he watches its ticker price every day, and is not emotionally stable about it. He sits, yelling from the sofa, as he obsessively watches Bloomberg TV. It’s not pretty, never mind healthy. The cat always darts out of the room if she hears Bloomberg come on.

Getting a feel for their investment nervous system, and what sorts of investments kids are comfortable making is such a gift of a lesson. If they have self-awareness about their investment disposition early, it will make them proactive about investing, wise about their tolerance for risk, and curious enough to educate themselves along the way.

1. First the definition: What is a stock? Take your time here, and don’t go too broad or detailed in explanation. A stock is a percentage of ownership in a public company. Each share of stock is a share in the company, like a citizen is a voter in a population. Every company with shareholders has an obligation to maximize the stock share’s worth. Shares of stock are traded every minute of every day, and people decide how much they want to pay for the shares based on good or bad news about the company. So the value of a share is never the same, even for a second.

They love this concept—why do they always love the idea of fast-moving, merit-based worth unless they’re arguing with me about the grade I gave them? Well, they love it until they realize how many shares there are to be divvied up, and that a precious few folks always own the majority. Their hearts sink when they realize that the majority shareholders are the only ones who influence the price of the stock, when they buy and sell in large chunks. (Don’t go into common versus preferred stock unless you’ve got a little economist on your hands. Save it for the more advanced lesson.)

Take the background of the stock definition just one step further: Big brokerage firms pool money together from big time stockholders, so when they buy a stock, they’re buying significant shares, and they affect the price of a stock tremendously. Suddenly they’ll know, on a base level, what ETrade and Smith Barney do.

There is so much more to explain, but just let that sink in for a while. It’s enormous on its own. Funny thing with stock lessons: Every little thing mushrooms into a macroeconomic view. So my whole approach to the stock primer for teens is to teach them a little at a time. Otherwise they get overwhelmed.

When you explain just the above, teens often resent stocks because they see the monolithic reason that corporations are “heartless.” They are indeed driven by a profit motive. But they also have a chance to see it’s not as evil as they think because corporate logic isn’t immoral, it’s amoral. If they grasp this, they’ll understand the world a little better. This was the key point that prompted my intern student to say it made her understand her political science class better.

2. Quickly segue to socially conscious companies and have them track three. Have them Google socially responsible investing. Individual company lists and mutual funds will pop up. I know this sounds tangential, but for teens and college students this is an essential second step in a stock primer. Otherwise, they’re going to go off on self-righteous diatribes about evil corporate America. You’ll lose them.

So, here’s my little trick. I tell them that socially conscious companies are ones that are green and humanitarian. For their lesson, they can invest in those. Green tech companies are a big favorite among teens. And they’re smart to like them. You may find yourself interested in buying in.

Teens love tracking the performance of the companies they believe in. But then comes the anthropological observation, which fascinates me in every class I’ve ever taught: I watch which kids stay devoted to socially conscious companies, and which kids stray, comparing dividends and return on investment to other conglomerates, and then go with the most profitable.

There are so many personality traits that shine through the stock lesson. Tell your kids that and let them see their true economic colors come out.

Regardless of which personality type they are, socially responsible investing will get their attention. (I will do a separate blog on just socially responsible investing, and how to really scrutinize the companies for true conscientiousness and profitability.)

3. Once you have their attention, tell them how people buy stocks. You can either call your financial institution and speak to an investment advisor there, or open a brokerage account at a place like ETrade or Smith Barney. Explain to the kids that the reason some people like brokerages is there are instances where brokerage houses get better prices because they’re trading such large chunks of shares, so when they’re buying you a stock, they’re probably buying thousands of other shares, affecting the price. They also can be first in to buy at the best price.

Now, if you’re a long term investor, the fractional difference in purchase price might not make a difference, and most brokerage houses charge a quarterly or annual fee for buying stocks. Most financial institutions have experts in house who can sit down with your teen and give advice, based on their questions.

4. Take them to your financial institution or brokerage, and have them talk to someone about buying stocks. If you don’t have a broker, call your credit union, because most of them have an investment office on staff. This appointment will be so interesting. Tell your teen to come in with questions about the three companies they’ve learned something about. Have the financial advisor explain purchasing a stock, why you need signatures and permission, fees associated, how performance is tracked, dividends paid out.

Have the goal of the meeting preset with the financial advisor. You want your teen to come out of there with three stocks to buy. Will they be the same ones the teen has tracked, or not? (You’ll see if they’re emotionally loyal, or reactive to compelling data. The advisor will recommend stocks they think are based in the area your teen has chosen). But don’t buy them yet.

5. Have them go to Virtual Stock Exchange and play the market, starting with those three stocks. See if they end up really wanting to buy them. Ask them to write down questions about the stock market each week for a month. If they stay with this game, buy them a share of stock at the end, based on their evaluation. If they don’t want you to buy stock, offer them a risk-free investment reward, like a CD, if you can. Don’t push buying the stocks.

Please share stock buying stories here. What sorts of companies are your kids interested in? Which kids ended up wanting nothing to do with the stock market and what did they have to say?

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It’s not too soon to teach your kid to plan financially, and invest in the world. In fact, if you wait until they learn it in school, or from some cold-calling financial planner, it will too late for them to have a confident relationship with making money from money.

I bought my first share of stock at age 13, compliments of my father. I tracked it for years. Never mind the economics classes I took. I learned how the stock market works because of my shares in Kaiser Cement. And I’ll get to the teen lesson about buying equities (individual stocks). But not first.

I’m going to start with how to buy Certificates of Deposit (CDs), or, as credit unions call them, Shared Certificates, for a couple of reasons. One, explaining what CDs are and how to buy them gives a primer on how financial institutions think and operate. Two, despite popular opinion, I do not believe everyone is cut out for buying stocks. I will address that in the Buying Stocks post. CDs, on the other hand, are a great starter investment for anyone.

And there’s never been a better time, because in this economy, they’re safe and sound. And now you can buy in for as little as $5. Check out this credit union offering a $5 Shared Certificate, designed especially for students. Financial institutions want Generation Y investors.

How to teach your teen to buy a CD:
1. First, give them a definition. A CD, or Shared Certificate, is a fixed-income investment issued by banks and credit unions, and is insured up to $100,000 ($250,000 on retirement accounts). Here’s what fixed income means and how it works: You give the financial institution a fixed amount of money for a set period of time—6 months, 1 year, 2 years etc. You may not use the money during this time.

In return, when that time is up, the financial institution gives you back the principal (your initial investment), plus a fixed amount of interest that is set at the time you buy in. That interest rate is going to be higher than a checking, savings, or money market account, which is why people like CDs. You make money on your money by tying it up. And that’s the key concept: If you withdraw your money before the set time is up, you get penalized by losing interest and in some cases, some of your original investment.

2. How to buy one: The simplest way is to go into the financial institution where you do your banking and ask them to sell you one. But, teach your teen to comparison shop. They can go online and Google CD rates, and see who has the best offer. Also, because their initial investment may be seriously limited, so may the offers.

Also have them look at potential types of CD—some have flexible withdrawal periods, some allow you to get the benefit of a better interest rate even if you’re in the middle of your locked in time period. But there aren’t a lot of options at low buy in rates. Still, no harm in asking. Have your kids write down questions to ask the financial institution once they find a good rate.

Comparison shopping is a key lesson here because they’ll learn an overarching investment principle: The more money you invest, the better deal you get. Period. People who dump $5,000 into a CD will get a better interest rate than someone investing $50.

3. Call the financial institution. Once they’ve chosen the deal that suits their needs, they simply call the financial institution, fill out the paperwork, and pay for it. (They may be bummed that they don’t receive an actual certificate in the mail, only a bank statement. I know I still am.)

4. Make sure to be clear about what happens for early withdrawal: Each financial institution is different. Some levy interest penalties, but some cut into your principal as well. Tell your kid to get the facts before they sign anything. For instance, don’t let them tie up money for 2 years instead of 1 because they didn’t realize if they changed their mind they’d have to pay for it.

5. Make sure they write down the CD maturity date and then call the financial institution to cash out before that date. Most CDs roll over (are reinvested) automatically if you don’t actively cash out. Legally, the financial institution has to notify you 30 days prior to a CD maturing, but don’t let them rely on that. Who wants to get embroiled in the paperwork of arguing who was right. You’ll win if they forget to notify you, but no one needs that headache. And they’re only required to send something out in regular mail, so all they have to do is prove they mailed it, not prove you got it.

This is a great lesson for kids in personal responsibility. Don’t stand on ceremony and blame others if things go wrong. Take the reins and make sure nothing goes wrong.

It’s like that old driver’s ed saying: Most accidents can be avoided with alert, defensive driving. Same is true for money.

What age do you think is appropriate to buy CDs? Please share your thoughts.

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This is a tough year for graduation presents. Whether it’s for the high school or college graduate, chances are you’re going to be able to buy less than you want.

Rule number 1: Don’t beat yourself up about this. This economy is what it is, and we all have to adjust.
Rule Number 2: Just because this year is bad doesn’t mean years in the near future will be bad, so think longer term with your gift. And that means investment vehicles.

I know it doesn’t sound tangible, or glamorous, or even useful to a teenage mind. Okay, honestly, I tested out this pitch on a college freshman (thinking he still straddled both worlds, or at least had a fresh memory of high school graduation). It went over like a lead balloon at first. But I kept tweaking it until he smiled.

So here’s what made him smile: Not just an investment vehicle, like a CD in his name. And not just an equity investment, which is sexier and liquid (and risky). And not just a local state bond fund, for which he’ll get a tax break.

No, what he thought was an “awesome present” was to give him a starter portfolio. That means you buy a little bit of everything, portioned out according to his age, designed for short-term, mid-term, and long-term growth strategies. Just like you have (or would have if you had the money)

It’s not only a great way to start out a lifetime of well-balanced savings and investment habits, you can use the opportunity to teach your kids. Take them into the bank or credit union, sit down, talk to the investment advisor, and plot it out together. Over the long-term, your kid will make some money. And it’s fun. I’ll bet they’ll love picking out one stock to buy. They’ll have opinions that are worth listening to, as well, once you really ask what teens think will be a growth market: fuel cells, biotech, tech medicine, telecommunications. They can watch the movement of the stock over time.

Before you think you’d have to spend a fortune, you don’t. You can do one of two things, depending on your budget:

Option 1: just purchase minimum buy-in amounts. You can invest in a CD for $100 in some cases. And individual equities don’t have to be expensive. Believe me, I now own some worth less than $10 a share. Same goes for municipal and state bond funds; they trade with a ticker price as well. The kids can choose a variety. The idea is to create a well-rounded starter pack. Maybe encourage your kid by saying you’ll contribute to each investment in the portfolio each year at this time (or tax time, because there are certain benefits if you want to divert funds into IRAs) for the next five years, if they also contribute. So you’ll match contributions. And in five years, they’ll be in the habit of contributing to investments.

Option 2: You can’t afford the CD buy-in, or minimum amounts other investments might require. Don’t fret. There are two other options. The first is to give them a portion of your investment portfolio—another great teaching opportunity because you and your graduate will have to create a chart and keep track of their percentage. So, if you have a CD socked away that has $500 in it, tell them, say, $50 of it is theirs. When it comes due, let them reinvest that $50.

The second option is to create a fake portfolio. Use real money, but you do it at home. Make up a portfolio folder, and write down investments. Track them with your kid, so you can calculate interest they’re earning. Say you “bought” them a $50 CD. In a year when it comes due, pay them interest. You can keep doing this until you can afford a real buy-in. And for some portions, like buying a share of stock, you’ll be able to afford a real buy-in now, so tuck that certificate into the portfolio folder; it will be the real portion.

Enjoy. It can be fun to invest together. You might learn a lot yourself, make new investment decisions for your own portfolio. And no, I can’t resist this last line: It really is the gift that keeps on giving.

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Teenagers want a good deal. They have to see cold, hard value to get in the mood for saving. And if they’re in the mood, you’ll have a much easier time teaching them to save wisely.

Creating a teenage money-saving disposition is essential, and tricky, because bad habits form quickly, while good habits are always hard fought. It’s like eating habits. Two-year-olds with a diet full of sugar will not only crave sweet food, but won’t develop a taste for greens. Greens aren’t necessarily natural, as counter-intuitive as that seems. Mother’s milk is very sweet, so kids are inclined to want sweets. You need to develop the taste for greens early so the stronger urge for sugar doesn’t monopolize their desires.

You need to instill saving habits immediately because kids need to develop a taste for saving. The good news is that if teens see what savings can do early on, they will develop a taste for it. That brings me to the savings plan which might make you very unpopular at first, but ultimately sort of cool. Please read all the way to the end before you judge the plan, or you’ll think I’m a wishy-washy hypocrite. I have found this plan works to create very savvy investor teens who know the difference between principal and interest, which one should be spent, and which one should be saved.

1. Insist they take a portion of what they earn and invest it in savings. Don’t just call it savings. Call it an investment in savings. Investment connotes return and they get that instinctively. The key is to make the portion hurt. Make them invest 50% of what they earn in allowance or a side job.

Open a savings account in their name and make the first investment effort short-term: one month, tops. Let them spend whatever they’ve saved after one month. That way they’ve seen what can happen when you let money accumulate—it becomes more money—and what it feels like to go a weekend without spending everything. But then they hit pay dirt so they feel like savings brings reward. Remember, the teenage brain thinks a month is an eternity, and we’re operating on the “gradual exposure creates successful acceptance” theory (my theory for everything).

2. Make the next savings plan three months. Let them spend it all at the end again.

3. Make the next savings plan 6 months, and have them invest in a CD. Do this by calculating what they’d save after six months, front it to them, and have them pay you from their weekly earnings. By the end of this time, they will be adjusted to saving, and it will feel very grown up. When the CD matures, let them spend the interest, but not the principal. Here’s their bonus: You match the interest they earn, which they get to spend. Explain to them that this is what employers often do for long-term savings plans.

4. Next, give them a choice: 1.) They can re-invest in another 6-month CD and continue to save 50% of their earnings. You will again match their interest earnings. Or, 2.) If they invest in a 1-year CD, they have the option to only commit 30% of their future earnings to savings. And with the 1-year commitment, you will triple match their interest earnings.

The idea is here to teach them the basic wealth accumulation habit of spending interest and not principal, and doing so requires long term commitment. Rich people don’t ever dip into principal. That’s what separates them from the rest of us. They live within their means and expect their principal ultimately to give them sustainable, recurring income.

Giving them bonuses for being willing to tie up their principal is worth it. The side benefit is they’ll realize that the key to saving off the top of earnings is that you forget you have it. When you forget you have something, you are willing to let it ride. You never get used to it in your pocket.

And throw them a bone for junk once in a while. Let them override your veto power with their spending money occasionally, even if you think it’s incredibly stupid. If they’re saving well, let them have it. When it comes down to it, I think most of my husband’s discretionary spending is idiotic, but he’s so much more pleasant when he gets his toys.

Okay, I admit it. So am I.

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