Investing vs Trading For Kids

Following on from last week’s blog, The Stock Market vs Crypto, which was very popular, I wanted to talk about investing vs trading in the stock market.

At first glance, they can look the same. You use the stock market to own a piece of different companies. But the difference is important, and misunderstanding it can stop people from using the stock market to build their wealth.

In this blog, I will explain how I define investing and trading to my kids and share my love-hate relationship with trading, especially when it comes to children learning about money.

🌳 Investing: Planting an orchard and letting it grow

Imagine you plant apple trees and wait. You water them, give them sunlight, and over time they grow and produce apples every year.

You are not trying to guess which type of apple tree will be the very best or when is the best time and place to plant them. You simply know that having many apple trees is better than having none. Even if there are storms from time to time that damage your trees (as they will grow back bigger and stronger after the storm).

That is investing. You own lots of companies (via a fund which buys all the companies in the stock market) and give them time to grow. Even if there are stock market crashes from time to time.

This way of growing money has been proven to be one of the most sustainable ways to grow wealth over time, but deemed too boring for many (I’ll come back to this point later).

🎰 Trading: Guessing the best tree at the best time

Now imagine you say, “I am only going to plant the very best apple trees, in the right location, at the right time.”

If you get it right, those trees grow tall and produce more fruit than all the others. But if you guess wrong, you end up with very little.

That is trading. You try to pick the right company at the right time with the goal of growing your money fast! It can be exciting, but it is also risky.

This approach is very popular as many people, especially those who believe they are smart, feel they can do better than ‘average’, i.e., do better than just investing in the entire stock market.

My love-hate relationship with trading

😠 Let me start with the hate part.

The secret to long-term success in growing money is finding a strategy that is sustainable. Trading is not.

I see trading as gambling for most people.

Research shows less than 15 percent of professional traders outperform the stock market over ten years. The odds for a beginner are even worse.

Yet social media is full of stories about traders making huge gains (see picture below). They try to sell their “magic tools” and “secret systems” so you can trade like them. These lure people in as they promise large returns and fast, but usually end in disappointment.

Compared to the boring strategy of investing in the entire stock market, trading costs more and over the long-term (5+ years) does worse.

So why do I have any love for it?

😍 Here is the love part (I note that 'love' is a strong word and I actually mean 'I see some slight positive'.)

Trading is deemed exciting. Even kids enjoy the idea of buying and selling their favourite companies. There is a real thrill in making money quickly, especially when friends are doing the same.

The excitement gets people interested in the stock market. And even though trading is not the best way to grow money, it is often better than leaving money sitting in cash.

Studies show the average trader earns around 2% to 4% less than the market each year. But even that can be better than the low returns of cash savings, over the long term, as market returns are around 8% to 10% per year on average.

In my view, trading can be a gateway. Someone might start with trading, realise how hard it is, and then shift toward long-term investing. That is a positive outcome.

My analogy is with reading. If a child is a reluctant reader, the research shows that it is better to start them with comics rather than force them to read books. The language and grammar may not be as strong, but at least they are reading. Over time, they can build the interest and confidence to move on to books. The same is true for investing.

For the avoidance of doubt, any trading that uses borrowing (leverage) is not something I would ever support. That can wipe people out completely.

📈 Stock market simulators in schools

Many schools use stock market simulators. Students get pretend money to buy shares and compete to see who earns the highest return over a few weeks.

This makes the stock market fun and gets them learning, but it really teaches trading rather than investing. The short time frame rewards quick buying and selling rather than patience.

Still, it opens the door. With the right guidance, students can move from trading to understanding long-term investing in the stock market. I just hope they don’t get put off the idea of investing if they have very bad outcomes during these lessons.

🔗 Combining investing and trading

If you want to make investing fun for kids, you can combine both approaches.

I like an idea shared by Tommy Perkins, host of the amazing Medics Money podcast. He uses three strategies with his children:

1. A boring index fund that invests in the whole market

2. A managed fund where “experts” pick the companies (with higher fees)

3. A few individual companies chosen by the kids

Over time, the results speak for themselves. The simple, boring index fund has outperformed the other two. His kids get to see the difference for themselves instead of just being told.

You can try this too. Let your kids pick some companies they know, but also put money in an index fund. Track them side by side. Over time they will see that the boring strategy is usually the winner.

Summary of Investing vs Trading

My view is simple. Investing in the whole stock market is better than trading when trying to grow money over the long term.

Trading is exciting but rarely successful in the long run. Still, it is often better than leaving money in cash. If trading gets kids interested in the stock market, I see that as a positive first step, even if it is not ideal.

The real lesson is that the most boring approach is usually the most effective when it comes to the stock market. If you want an entertaining way to teach this to your kids, I recommend reading them the story of Mr. Lazy’s Trees, from Grandpa’s Fortune Fables. You can read the story here.

Want more guidance on investing?

If you have not started talking to your kids about the stock market, check out my blog How to Teach Kids About the Stock Market (which was featured in the Financial Times).

You can also find my book, guides, and other resources as part of the Wealthy Kids Club.

I hope you found this blog useful. If so, please like and share it with other families and subscribe for more tips to help your kids grow their wealth.

Thanks for reading,

Will

P.S. Grandpa’s Fortune Fables has fun stories that help kids learn about investing and other money topics. It is available on Amazon or as part of the Wealthy Kids Club.