Sleep disorders, or parasomnias, occur in 35-45% of children aged 2-18 years. Common sleep disorders in children include sleepwalking, sleeptalking, night terrors, and nightmares.
Childhood parasomnias are believed to be a benign disorder caused by immaturity of neural circuits, and most resolve during adolescence. 
Nightmares are defined as “recurrent episodes of awakening from sleep with recall of intensely disturbing dream mentation, usually involving fear or anxiety, but also anger, sadness, disgust, and other dysphoric emotions.” 
Nightmare disorder is defined in the Diagnostic and Statistical Manual of Mental Disorders, Fifth Edition (DSM-5) as repeated awakenings with recollection of terrifying dreams, usually involving threats to survival, safety or physical integrity. 
Nightmares are frightening events for a child and may be concerning for the family; however, they are transient and developmentally normal for most children. 
Upon awakening from a nightmare, the child is alert and able to recall the dream in detail. The child's reaction to the nightmare may interrupt the parents' sleep. In the morning, children often recall the arousal. The sleep disturbance may impair the child’s daily functioning.
Diagnostic criteria (DSM-5)
The specific DSM-5 criteria for nightmare disorder are as follows: 
Recurrent episodes of extended, extremely and well remembered dysphoric dreams that usually involve efforts to avoid threats to survival or security or physical integrity. The nightmares generally occur in the second half of a major sleep episode.
On waking from the nightmare, the individual becomes oriented and alert.
The episodes cause significant distress or impairment in social, occupational or other areas of functioning.
The symptoms cannot be explained by the effects of a drug of abuse or medication.
The nightmares cannot be attributed to another mental disorder (i.e., posttraumatic stress disorder, delirium) or medical condition.
In addition, nightmare disorder is specified by duration: acute (less than 1 month), subacute (1-6 months), persistent (more than 6 months); and by the severity based on frequency: mild (less than one episode a week), moderate (multiple time a week), severe (nightly).
Sleep is divided into 2 distinct states: rapid eye movement (REM) and nonrapid eye movement (non-REM). REM and non-REM sleep alternate in 90- to 100-minute cycles. REM sleep is characterized by EEG activity similar to a wakeful pattern. In older children and adults, 75% of sleep is non-REM sleep, which consists of 4 stages.
Dreaming and nightmares occur during REM sleep, and they are more frequent in the second half of the night.
Nightmares are often confused with night terrors, which are episodes of extreme panic and confusion associated with vocalization, movement, and autonomic discharge. Night terrors occur during non-REM sleep. Children with night terrors are difficult to arouse and console and do not recall a dream or nightmare.
Nightmares are common, with three quarters of children experiencing a nightmare at least once. 
Prevalence varies because of different diagnostic criteria and different study populations. Nightmares have been noted to occur in 2-11% of young children “always and often” and in 15-31% “now and then.”  Some studies estimate as many as 50% of children aged 3-6 years have nightmares that disturb both their and the parents' sleep.
Approximately one third of adults with recurrent nightmares have onset of symptoms in childhood.
Nightmares occur in all races and cultures, with no reported differences in prevalence.
In one study, nightmares first emerged as a parent-reported sleep problem in children aged 24-36 months, but onset typically occurs between the ages of 3 and 6 years. 
The prevalence of nightmares and other parasomnias declines in school age and adolescence, presumably due to progressive neurological maturation and reduction in separation anxiety.