Investing Basics for Teenagers: A Beginner's Guide

Why Invest 

Investing can seem like a complicated and daring project for new-comers to delve into. This is especially so for teenagers who are just beginning to form their financial future. However, understanding the basics of investing is essential for achieving financial independence early on, so you have a head start against most of the competition. This guide will help break down the primary concepts of investing for those who don’t have much experience at all.

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Why Start Investing Early?

Starting to invest at a young age can have significant benefits. The earlier you begin, the more time your money has to grow. This is due to the power of compound interest, which means you earn interest on your initial investment and on the interest that accumulates over time. For example, imagine you are 18 years old and have invested $1,000 into a savings account with 7 percent interest annually; after 10 years, this investment will be over nearly $2,000. So, you are able to double your investment with little to no work at all over 10 years. And by investing in stocks, this number can grow even faster than the compound interest that was previously mentioned. I say all of this to try and underscore the immense money-making opportunities investing can have, even if it is just interest through the bank. 

 The Benefits of Early Investing

• Time on Your Side: The longer your money is invested, the more it can grow. Even small amounts can add up over time.

• Learning Experience: Investing early allows you to learn about the market and develop good financial habits. So, when you’re older, you will be ahead of the game and have a strong foundation in investing.

• Financial Independence: Building wealth through investing can lead to greater financial freedom in the future.

Understanding Different Types of Investments

There are several types of investments you can consider. Each has its own level of risk and potential return.

Stocks

Stocks represent ownership in a company. When you buy a stock, you become a part-owner of that company. Stocks can be volatile, meaning their prices can go up and down quickly. However, in comparison to interest from the bank, stocks have a much higher ceiling to make a lot more money. Therefore, while stocks can be riskier on the surface, the opportunity they provide is too significant to pass up. Also, you can mitigate the potential risk by diversifying your portfolio in several different industries and companies; this will be discussed in further detail later. 

Bonds

Bonds are loans you give to companies or governments. In return, they pay you interest over time. Bonds are generally considered safer than stocks but usually offer lower returns. These lower returns are due to the lack of volatility that bonds encompass. This means that while the potential for high returns is lower than a stock investment, it’s less risky and has more potential to be a steady investment. 

Mutual Funds

Mutual Funds pool money from many investors to buy a diversified portfolio of stocks and bonds. This can be a good option for beginners because it spreads out risk. 

Index Funds

Index Funds are a type of mutual fund that track/delegate certain resources to a list of companies within the fund. For example the S&P 500 is an index fund of the 500 largest publicly traded U.S. companies. So, when somebody buys a share of the S&P 500, they own a small portion of each of the 500 companies. However, some may think that if they purchase a share of the S&P 500, 0.2% of the money they spend will be delegated to each company. However, this is not how it works. For example, if somebody buys a share of the S&P 500, 7% of the money they spent on that share will be delegated to Apple. Thus, one’s investment is not equally distributed to each of the 500 companies when they purchase a share of the S&P500. 

Why Invest in Index Funds:

Investing in index funds is a safer alternative to buying shares of a company outright. This is because an index fund distributes their investors’ money throughout several companies. Therefore, if one company’s stock goes down, the entire index fund won’t crash; instead, it will only take a minor hit (depending on how many companies are in the fund). So, I highly recommend investing in index funds because they are the sweet spot between stability and potential for a high return. 

ETFs (Exchange-Traded Funds)

ETFs are similar to mutual funds but trade like stocks on an exchange. They often have lower fees and can be a good way to invest in a specific sector or index.

Setting Investment Goals

Before you start investing, it's essential to set clear goals. Ask yourself what you want to achieve with your investments. Here are some common goals:

• Saving for College: If you plan to attend college, you might want to invest to grow your savings.

• Buying a Car: If you want to buy a car in a few years, consider investing to reach that goal faster.

• Building Wealth: If your goal is long-term wealth, focus on investments that can grow over time.

Creating a Budget

Before you can invest, you need to have a budget. A budget helps you understand how much money you can set aside for investing. Here’s how to create one:

1. Track Your Income: Know how much money you have coming in each month.

2. List Your Expenses: Write down all your monthly expenses, including necessities and discretionary spending.

3. Identify Savings: Determine how much you can save each month after covering your expenses.

4. Allocate for Investing: Decide how much of your savings you want to invest.

Choosing an Investment Account

To start investing, you'll need an investment account. Here are a few options:

Brokerage Account

A brokerage account allows you to buy and sell stocks, bonds, and other investments. Many online brokers offer accounts with low fees and no minimum balance. Some of the most well known brokerage accounts are Charles Schwab, Robinhood, and Vanguard. However, teenagers themselves can’t open up their own account independently until they are 18 years old. Therefore, your parents have to open one up for you. Some kids may be discouraged by this as they want more independence, but I have noticed that the Fidelity Youth Account program (under the company Fidelity Investments) allows kids to maintain most of their autonomy while investing without too much parental oversight. So, if you’re a teenager looking to open up a Brokerage account, I encourage you to look into Fidelity and their youth program. Here is the link to Fidelity youth: https://www.fidelity.com/go/youth-account/overview?utm

Robo-Advisors

Robo-advisors are automated platforms that create and manage a diversified portfolio for you based on your risk tolerance and goals. They are user-friendly and often have lower fees than traditional advisors. I especially recomend Robo-Advisors for those of you who are just starting out. I have found that they can help earlier investors mature an understanding of diversification and smart investing.

Learning About Risk

Every investment comes with some level of risk. Understanding risk is crucial for making informed decisions. Here are some key points to consider:

• Risk Tolerance: This is your ability to handle fluctuations in your investment's value. Younger investors can often take on more risk since they have time to recover from losses.

• Diversification: Spreading your investments across different asset classes can help reduce risk. Don’t put all your money into one stock or sector. So, I would recommend investing in individual stocks, bonds, and index funds in order to diversify. Also, coming from me, I know it may be tempting to invest the majority of your money into one sector (ex: tech), but in order to properly diversify, you must invest in several different sectors. 

• Market Volatility: The market can be unpredictable. Prices can rise and fall based on various factors, including economic conditions and company performance.

Researching Investments

Before investing in any asset, it's essential to do your research. Here are some tips:

• Read Financial News: Stay updated on market trends and economic news.

• Analyze Companies: If you're investing in stocks, look at a company's financial health, including its earnings, debt, and growth potential.

• Use Investment Tools: Many online platforms offer tools and resources to help you analyze investments.

Starting Small

You don’t need a lot of money to start investing. Many platforms allow you to invest with small amounts. Here are some ways to start small:

• Fractional Shares: Some brokers allow you to buy a fraction of a share, making it easier to invest in expensive stocks.

• Dollar-Cost Averaging: This strategy involves investing a fixed amount regularly, regardless of market conditions. It can help reduce the impact of volatility.

Monitoring Your Investments

Once you start investing, it’s important to monitor your portfolio. Here’s how to do it effectively:

• Review Regularly: Check your investments periodically to see how they are performing.

• Rebalance Your Portfolio: If one investment grows significantly, it may take up a larger portion of your portfolio. Rebalancing helps maintain your desired asset allocation.

• Stay Informed: Keep up with news that may affect your investments.

  
  

  Learning from Mistakes

  Investing is a learning process. You may make mistakes along the way, and that’s okay. Here are some common pitfalls to avoid:

  • Emotional Investing: Don’t let fear or greed drive your decisions. Stick to your plan.

  • Chasing Trends: Avoid jumping into investments just because they are popular. Do your research first.

  • Timing the Market: Trying to predict market movements can be risky. Focus on long-term growth instead.

  
  

  Conclusion

  Investing as a teenager can set the foundation for financial independence in the future. So, while investing may seem like a daunting task, the sooner you begin, the sooner you will realise how beneficial and fun it can be. For me personally, investing has been the biggest passion of mine that I have matured since 7th grade, and I’m so grateful that I started my journey this early. Also, remember that in the beginning (just like anything else) there will be difficulties and turmoil. But the more persistent you are, the more you will grow from your mistakes and improve as an investor.