How to teach your kids about the stockmarket

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There is plenty to learn about the sharemarket so why not start teaching your kids early?

Often high school students play the ASX schools game where they are given a hypothetical $50,000 to trade for 10 weeks.

They learn how to research companies and the importance of wise investment.

Some generous parents or grandparents give their kids and grandchildren a small parcel of direct blue chip shares.

Others direct their child's savings into the sharemarket. If you don't know much about it you could learn together with the online seminars run by the ASX or some brokers.

Begin with the concept that anyone can own a tiny part of a company and move on to the mechanics and costs of buying and selling.

It can be exciting as you can watch the share price go up and down. There is plenty to learn about the company too. The idea of buying the whole market inexpensively through an exchange-traded fund (ETF) is also important.

The sharemarket has delivered good returns over the long term. Since 1875 the average return is 11% per annum. They can be huge (such as 66% in 1983) but the losses can be big too (like the 40% fall in 2008).

Along the way a company pays dividends for owning the shares. When the market is not rising strongly, dividends account for the majority of returns.

There are a couple of issues to consider when buying shares for your child or grandchild. The first is whose tax file number (TFN) will you give?

You can easily get one for the child and quote that or you can quote your own if you are the trustee for the child. If you buy them through a family trust, give the TFN of the trust.

The person who owns the shares then declares the dividends or the net capital loss from the sale of the shares.

For example, if you buy some shares for your child and they earn $400 in dividends, the child must declare the dividend income. But with the low-income tax offset a child does not have to pay tax if they earn less than $3000.

If they don't, claim a refund for franking credits. It can boost returns by 1% to 1.5% because the company has already paid company tax (imputation) and the tax is allocated to you as franking credits. These are attached to the dividends you receive.

In a roundabout way the tax office starts all over again by taxing the total of the dividend and the tax previously paid by the company.

You receive a credit for the tax the company has paid. If the owner of the shares is tax exempt this effectively results in a refund of company tax. If you choose to reinvest the dividends, you can still claim a refund for any franking credits.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.