How to explain brokerage accounts to kids

A brokerage account is an investment account where you can deposit money to buy stocks, bonds, mutual funds, and ETFs. Your brokerage account will keep track of your gains, losses, dividends, and more! The company who helps keep track of the different things that you own is called a brokerage. Because it is so complicated, the government has a lot of rules and regulations to make sure brokerages are always protecting their customers.

Takeaway

A brokerage account is an account that is used by a person who wants to invest in securities like stocks, bonds, and mutual funds. Choosing a brokerage firm and an investment account can be stressful since many options are available. It is essential to explore what is out there before settling on one.

Refreshers

• Stocks 
• Bonds
• ETFs

Stocks

A stock is a little piece of a much bigger company. Imagine that a company is a castle made out of Legos. A stock is like one Lego piece in that castle: When you buy the stock, you own that piece of the company. 

Bonds

A bond is like an "I owe you" (IOU) from a company or government that can be traded on the market. When a company needs money, it can sell bonds to people like you and me. They "borrow" this money from you, hoping that your investment can help grow the company. You make money if they pay you back with interest over time. The interest rate on each bond is different. More risky bonds have a higher interest rate, since it is more likely that they won’t pay back on time and lenders need to charge a higher rate to make up for potential losses.

Exchange-traded Funds (ETFs)

An ETF is a way to easily invest in multiple companies at once that usually focuses on a theme like “the car industry”. You pay a small fee to a company that monitors the performance of the ETF and researches the industry or region the ETF is focused on.