Investing your money instead of putting it in a standard savings account is the best way to make a lot of money throughout the years, and that doesn’t need to wait until you’re an adult. If you want to save for retirement or have tons of money in your possession in the future, investing is the way to do it, and starting early is the best advantage for financially literate young people. Therefore, it’s important adolescents and teens gain exposure to financial and investing topics long before their first adult job, so ideally they can start being smart with their allowance and summer jobs and begin investing that nest egg today. That’s why we’ve gone ahead with the below guide of how to invest in stocks as a teenager, and we believe every teen and parent should read and share it.
Getting Started Is Easier Than You Think
When you first start learning about investing your money, the terminology might be a little confusing to you, but it won’t stay that way for long. The fact is, investing is not that difficult once you learn the basics. Fortunately, many types of investments don’t require that you be an adult, so with a lot of them, you can open an account if you’re 13 years old, and younger investors can have a custodial account under their parents’ names. Keep in mind that investments work best when they’re kept in their accounts long term because all investments fluctuate through the years, so the real money happens with years of compound interest or compounding appreciation, depending on the type of investing account.
Here are some of the best things you can do when you’re new to the world of investing.
- Learn Everything You Can About Investing
There is certainly a lot of information out there to learn, and the first thing you’ll want to study is the number of accounts available to you. For the most part, you’ll be investing in stocks, but you have to learn a little about them (and understand how the stock market works) before making your investment decisions. There are also several books written specifically for teenagers who wish to start investing, one of them being The Motley Fool Investment Guide for Teens, which you can purchase on Amazon. That said, there are investment options other than individual stocks, like ETFs (exchange traded funds), CDs (certificates of deposit), bonds, and more (which we’ll discuss below), so realize you have a variety of financial products at your fingertips, a diverse combination of which may result in the best investments.
- Decide How Risky You Want to Be With Your Investments
There is always a risk involved with any type of investment, but when you’re an investor, you can choose just how much of a risk you want to take with each of them. This will give you what some people call an investment identity. It will affect your decision to participate in either active investing, whereby investment managers try to outperform a certain index; or passive investing, which means the goal is to merely match an index’s performance.
- Determine Which Investments Are Right for You
Once you learn about things such as mutual funds and individual stocks, it’ll start to become clearer just which investment types are best for you. Research various stocks and learn which ones align with your particular goals and interests. One thing you might want to do to make the right decision is take a look at their financial statements, which should be readily available to you on the investor relations section of their websites. This will help you figure out which of the companies are more likely to survive when economic times are more challenging. You can also use tools like Investopedia to help you get a better grasp on evaluating a company’s financial health.
- Go Ahead and Open Your Account
An investment account is usually easy to open, but some of them may require your parents to open them because their minimum required age is 18. Most accounts can be opened online these days, and you can usually get them set up in about 15-20 minutes. If you’re old enough to have a job, you might want to consider starting your investing career with some type of individual retirement account (IRA), which is specifically designed to save for retirement.
- Make Your First Investment
Most accounts require that you keep an online wallet with money in it at all times, and you can use that money to invest in a company or a group of companies any time you wish. When you make an investment, try to make it during market hours. You’ll also eventually want to have a diversified portfolio, which means you’re trying to invest in many different types of investments and many different companies to offset and minimize the risk if any one asset goes down in the long haul.
With some of these investments, your parents might have to set up a custodial account, but you’ll still be able to use it just like you are the only one who owns it. Most of these sites also provide you with a lot of information that you can use to make better investment decisions. For young adults just getting started investing their money, this information can prove to be invaluable.
What Are the Different Types of Investments?
To be an effective investor, you have to know the basic differences between the types of investments, and this is a lot easier than you think. Below are some of the investment types you might want to consider once you start investing.
- Bonds. These allow you to receive cash from various companies. They pay higher rates than U.S. Treasury bonds but also have higher risks.
- Certificates of deposit (CDs). CDs can only be cashed in after a certain length of time, but they provide a higher interest rate than standard savings accounts and are a safe way to invest.
- Exchange-traded funds (ETFs). Think of ETFs as a group of assets, similar to funds. The main difference is that you can trade throughout the day and not just at the close of the day.
- Funds. With funds, you don’t choose what you’re going to invest in but instead, it is a pool of funds and the funds are managed for you.
- High-yield savings account. This is a low-risk savings account that pays only slightly more than regular savings accounts do, but they are safe and carry little risk.
- Mutual funds. Mutual funds take investments from shareholders and pool them together in order to invest in things such as stocks, bonds, and more. They are managed by a money manager.
- Stocks. Stocks give investors a stake in a certain company. You can cash them in at any time, and if you keep them long enough, they are almost certain to grow.
As mentioned earlier, the difference between active and passive investors, and passive investments are also called index funds, which is a term you’ll hear while doing your research. Index funds are meant to meet, not beat, a particular index, including the S&P 500. They require low fees and normally (hopefully) replicate the performance of a certain index. And for the most part, you don’t have to worry about large capital gains taxes with this type of investment.
Some Investments Are Easier to Utilize Than Others
Some things we consider investments don’t feel like investments in the true sense, but they are money-makers nonetheless. For instance, a small piece of land might not cost you a lot of money, depending on where it is located, but it can be extremely profitable if you keep it long enough because with very few exceptions, real estate always appreciates in value. Regardless of what your financial goals are, buying land or a home and keeping it awhile is a great way to invest in your future.
In addition, keep in mind that there are different types of IRAs. IRAs are designed for people who don’t have access to other savings and retirement methods, such as 401Ks, on their job. A lot of people who work for themselves have IRAs, and you can choose between a traditional IRA and a Roth IRA. For one thing, Roth IRAs are good for people who intend to be in a higher income bracket once they finally start withdrawing the cash. Traditional IRAs are best for people who expect their income to be about the same or even lower.
While Roth and traditional IRAs have similar yearly contribution levels, contributions for the former come from after-tax dollars, while contributions for the latter can include both pre- and after-tax dollars. Distributions (withdrawals) are mandatory after you turn 72 if you have a traditional IRA, whereas no mandatory distributions are required with a Roth IRA. The thing is, an IRA or even a standard retirement account can be the easiest way for the average individual to grow their net worth.
How Challenging Is It for Teens to Start Investing?
While many investing opportunities are only available to those who have reached the age of majority, which is typically 18 years of age, there are some exceptions. Fidelity Investments has their own investment account just for kids ages 13-17, which provides them with an early introduction to the world of investments. Known as the Fidelity youth account, it helps teenagers save, spend, and invest their money, and it even provides them with a free debit card to use. These debit cards make all of the transactions a lot easier and help teach teens valuable things about their money.
Teenagers should also take into consideration two things when they’re interested in investing. First of all, learn about custodial accounts that allow you to do things you might not otherwise do, especially if you’re very young. Second, try to decide exactly what you’re saving the money for – if possible. Sometimes teens save just for the sake of saving, whereas other times they are investing for educational purposes or to travel the world once they reach a certain age.
If you’re interested in another important type of custodial account, you might want to talk to your parents about setting up a UGMA account, which is a custodial account made for the teenager but managed by the parents. A Uniform Gifts to Minors Act account, also called a Uniform Transfers to Minors Act (UTMA) account, is a great way to save for college, but it should be researched first to make sure it is right for you. UTMA and UGMA accounts are similar to 529s but vary in many ways.
Another decision for you to make is whether you want to manage your investments yourself or go through a brokerage firm. The latter is usually recommended simply because your investments are professionally managed. TD Ameritrade and Charles Schwab are two types of brokerage accounts, but there are others as well. A taxable brokerage account such as this is perfect for inexperienced or very young investors who still aren’t completely familiar with this type of activity. Of course, you can get investment advice from family members or friends, or even your financial institution, but when you’re a newbie, it’s always best to go with a professional. It makes the entire process much less stressful and less time-consuming, which is important when you’re a busy high school student.
Things for Teen Investors to Consider
All in all, getting started in investing isn’t that difficult, even for people at a very young age. While you’re likely to be anxious to get started, it’s good to keep a few things in mind first. These things include:
- Never invest more than you can afford to lose. This is a major tip to follow for any investor, but it’s especially important for young people, and it affects how much money you should invest each time.
- Determine your level of risk tolerance. Are you conservative with your investments or more bold? It’s up to you.
- Learn the basics about money, including concepts such as compound interest and interest rates, because this can help you estimate how much money you might make with a certain investment.
- Remember that an online brokerage account makes investing a little faster and simpler because you’re doing everything online. Online brokers are invaluable when it comes to doing better overall with your investments.
When researching any investment, consider its past performance as a way to predict what it might do in the future, but practice caution and realize there is always market risk. Remember what you learned about not investing more than you can afford to lose? All investments come with a certain amount of risk, so anytime you start to invest in something, you need to keep that in mind. If you do, it can help prevent a lot of heartache in the future.
When it comes to your personal finance rules, it behooves you to be careful at first, and to do a lot of research before you make any final decisions. The more research you do on basic investing, the more likely you’ll be making smart choices, but keep in mind that this isn’t rocket science. It isn’t like you have to study it for years before you can make that first investment. The bottom line is, it’s easy and fun to jump in with both feet and learn what needs to be learned along the way.
Another important tip is to invest at least a small amount of money on a regular basis. While it’s possible to make money investing with irregular but large amounts of money, it’s a good idea to be consistent with your investments, regardless of how much you invest each time. This is something any investment advisor will tell you because investing a small amount of money regularly over time usually allows for a bigger investment than making investments only every once in a while.
Of course, you’ll also want to choose investments that produce a higher interest rate, which means just placing $20 per week in a regular bank savings account will never make you more than investing $20 per week in some type of stocks or bonds. In other words, choose your investments carefully because your potential ROI (return on investment) will vary quite a bit from one investment to another, and some pay dividends on a monthly or quarterly basis, which you can automatically reinvest with each distribution you receive.
Finally, it’s important that you have at least some idea of why you’re saving and growing this pile of money to ensure all your life and financial decisions are aligned with your long-term goals. Maybe you just want to have a nest egg saved up in case you want to buy something for yourself, or maybe you have a specific goal in mind. If you’re a teenager, this can be difficult to do, but remember that saving for the sake of saving is never a bad idea, either. You’ll still end up with a lot of money in the bank at some point, so long as you pour your money into appreciating assets and things that produce a return and steer clear of depreciating liabilities and impulse purchases that are fleeting and have no ROI (return on investment).
Conclusion
Even if your current financial literacy is lacking, it’s easy to learn about investing money because there are tons of online resources that help you do just that. If you’re interested in some of the newer ways to invest, such as cryptocurrency including Bitcoin and Ethereum, it’s better to spend extra time researching them, as these are among the least regulated and most risky assets around at the moment. Cryptocurrency is essentially digital currency that can be used to make many purchases, but in the U.S. it hasn’t yet been accepted as legal tender. This is something to consider before you go too crazy with your cryptocurrency investments.
If you invest small amounts at first and keep doing your due diligence, you’ll start to increase your confidence and you’ll be able to learn what types of investments might work out better for you. In the end, it’s good to remember that while all investments come with a certain amount of risk, you can easily learn which of them is riskier if you learn as much as possible about the different types. Teens who start investing at an early age don’t regret doing this because years or decades from now, they’ll most certainly have a lot more money in the bank than those teenagers who never started investing or saving. Once you learn how to invest in stocks as a teenager, the world of financial independence and smart long-term decision-making opens up and you’re truly able to prepare for a successful future and a healthy relationship with money, which many young people lack due to limited financial literacy.