Teenage Investment: Strategies For Early Financial Success

Investing as a teenager is a great way to build a strong financial foundation for the future. With time on their side, teens can harness the power of compounding to grow their savings and give their investments time to increase in value. While investing may seem complicated at first, especially with all the terminology, there are several steps teens can take to begin their investment journey.

Firstly, it is important to gain basic stock knowledge and understand investing fundamentals. This includes learning about stocks, funds, the economy, and other investments such as exchange-traded funds (ETFs) and cryptocurrency. There are many free resources available online, such as TeenVestor.com, YouTube channels, and websites like Investor.gov and Investopedia.

Once teens have a grasp of the basics, they can start by investing in what they know. This could include stocks from companies they are familiar with or whose products they use, such as clothing brands, tech devices, or streaming services. It is also crucial to understand the importance of diversification and not putting all their eggs in one basket.

Teens should also be aware of the benefits of a buy-and-hold strategy, which involves investing for the long term rather than treating it like a short-term game. Teaching teens about patience and compound interest can help them understand how their investments can grow over time.

To get started, teens can experiment with dummy or mock portfolios on sites that offer stock market games. They can also open a custodial brokerage account with the help of a parent or guardian, which allows them to make investments under supervision until they reach the age of majority.

By starting early and educating themselves, teens can build a solid foundation for their financial future and take advantage of the benefits of investing.

Learn the basics of stocks and investing

Investing can seem complicated, especially the terminology. However, it is worth the effort to learn about it, especially for teens who have many years ahead to harness the power of compounding potential to help their savings grow and build a strong financial foundation for their life goals. Here are some tips to help you get started:

• Understand investing terminology and concepts: Start by breaking down complicated words and topics into simple terms. For example, a bond is a loan that an investor makes to a company, government, or government-sponsored entity. In exchange for the loan, the borrower will pay the investor interest over time until the bond matures, which is the date when the investor gets the principal amount they invested back. A stock is also not complicated when broken down. When a company wants to raise money, it can sell pieces of itself as shares of stock. If you buy a share, you become a shareholder and part owner of the company.
• Learn about different types of funds: There are various funds that any investor should know about. A mutual fund, for example, pools your money together with other people's money to buy a collection of stocks, bonds, and other securities. Similarly, an exchange-traded fund (ETF) represents a variety of different investments. Each of these fund types has its own nuances, which you should familiarize yourself with.
• Understand asset allocation, risk tolerance, and diversification: Teaching teens the fundamentals of investing shouldn't stop at definitions. They need to know about asset allocation, risk tolerance, and diversification. Diversifying investments by buying many different stocks can help guard against losses if a single stock decreases in value. Diversification can also be achieved by investing in different types of companies and industries. While diversification does not guarantee profit or protect against loss, it can help balance risk and reward.
• Know the difference between speculation and investing: Young investors may be drawn to the excitement of trading meme stocks or cryptocurrencies. While teens have time to take on more risk in the market, they should be prepared for losses if they take a speculative approach rather than a long-term investing strategy.
• Understand the benefits of a "buy-and-hold" strategy: Investing is not a game; it involves real money and real risks. Markets can be unpredictable in the short term, but historically, the stock market has moved upward over longer periods. Regularly investing in quality stocks and holding them for years, not days, has been a good strategy for many investors.
• Learn about compound interest: Compound interest is considered the most powerful force in the universe by some. Teens have time on their side, and small, consistent investments can grow significantly over time. The Rule of 72 is a simple formula that can help you understand how long it may take to double your money at a specific interest rate.

Identify investments appropriate for teens

The best investments for teenagers can range from stocks to exchange-traded funds to some low-risk assets such as treasury bonds.

If you want to invest in assets that are not as risky as investing in just a handful of stocks, you should consider investing in index-based exchange-traded funds (ETFs). ETFs are investments that represent a diversified group of companies that trade just like stocks. They are like mutual funds, except you can buy them the same way you can buy stocks through your online broker.

The particular type of ETFs that would be appropriate for teen investors are based on broad market indexes such as the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. These indexes track a wide variety of large stocks, so the volatility of the index-based ETFs reflects the price movements of the underlying stocks. This means that by buying ETFs backed by indexes such as the Dow Jones Industrial Average or the S&P 500, for example, a teen investor is diversifying his or her investments, thus making for holdings of safer assets.

An ETF based on the NASDAQ is a bit of a different story when compared to an index based on the Dow Jones Industrial Average or the S&P 500. The NASDAQ is generally considered to reflect the change in the value of technology stocks. Therefore, a NASDAQ-based ETF will also reflect the values of such stocks as opposed to the entire stock market.

The ETF symbols you need for buying broad index-based ETFs are as follows:

• The Dow ETF: SPDR Dow Jones Industrial Average ETF Trust - symbol: DIA
• The S&P 500: Vanguard S&P 500 ETF - symbol VOO
• The NASDAQ: Invesco QQQ - symbol: QQQ

One of the safest investments a teen investor can make is buying U.S. savings bonds. Savings bonds are loans American citizens make to the U.S. government. You should view these bonds only as a way to save money, not as a way to grow your nest egg through price increases, such as is the case with stocks and ETFs. There are two types of savings bonds: Series E.E. U.S. Savings Bonds (or Series EE Bonds) and Series I Savings Bonds. Both types of bonds are low-risk investments that pay interest for up to 30 years. The Series I Savings Bonds are similar to the Series EE Bonds with one crucial distinction: the Series I Bond interest rate is adjusted periodically based on the inflation rate.

The U.S. Treasury stopped issuing paper savings bonds – you merely register to buy the securities at the website, www.treasurydirect.gov. Like any other investment, a minor will need a parent or guardian to open up a custodial account in their name.

How Teens Can Start Investing in Stocks

You may want to get started choosing stocks based on your own interests. By looking for stocks in which you have an interest, you are likely to be more engaged in trying to understand how the stock market works. Here are some hints about what to consider when choosing stocks as a beginning investor:

• Businesses in which your relatives work
• Companies discussed in business publications like the Wall Street Journal
• Companies headquartered in your state
• Big companies included in an index such as the Dow Jones Industrial Average or our index, The TeenVestor Index Portfolio shown in this article: Stocks for Kids.
• Companies that produce some of the items your friends and classmates like

With regards to companies that produce items teens like, a company called Piper Sandler does a survey each year of over 7,000 teens to discover what brands they like and use. These include brands of shoe companies, restaurants, snacks, clothing, and many other consumer items and services young people use. Basing stock purchases on brand recognition may not be the best way to decide what stocks to buy, but the companies in the survey may give you some initial investment ideas. Later, when you get more experienced in investing, you can do fundamental research to see which stocks are worth your money.

• Top 3 Footwear Brands: Nike (Nike, Inc.), Converse (Nike, Inc.), Vans (VF Corporation)
• Top 3 Handbag Brands: Coach (Tapestry, Inc.), Michael Kors (Capri Holdings), Kate Spade (Tapestry, Inc.)
• Top 3 Restaurants: Chipotle (Chipotle Mexican Grill, Inc.), Starbucks (Starbucks Corporation), McDonald’s (McDonald's Corporation)
• Top 3 Snacks: Goldfish (Campbell Soup Company), Lays (PepsiCo, Inc.), Cheez-it (Kellogg Company)
• Top 3 Clothing Brands: Nike (Nike, Inc.), American Eagle (American Eagle Outfitters, Inc.), Lululemon (Lululemon Athletica Inc.)
• Top 3 Payment Apps: Apple Pay (Apple, Inc.), Cash App (Block, Inc.), PayPal (PayPal Holdings, Inc.)

Custodial Accounts

People younger than 18 can get an early start on retirement planning through a custodial account. In a custodial account, an adult controls the investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state. Note that the conditions for different types of accounts may vary by the financial institution providing the service.

Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are a great way to transfer assets to a child or teen, but the custodian adult maintains the legal responsibility and the final say over the investment decisions.

People younger than 18 can even get an early start on retirement planning through a custodial Roth individual retirement account (Roth IRA), but they will need earned income from a job or another paid activity to begin contributing. There are also joint brokerage accounts that allow minors to share legal ownership with an adult, which may help younger people take a more active role, although investment decisions are generally subject to approval by the adult co-owner.

Understand the difference between speculation and investing

As a teenager, it is important to understand the difference between speculation and investing to make well-informed decisions. Here is a detailed overview of the crucial factors differentiating the two:

Risk Management

Investing involves taking on a moderate amount of risk with the expectation of generating a satisfactory return on capital over time. This approach focuses on long-term, incremental gains and is rooted in the tangible success of a company. On the other hand, speculation involves taking on a high level of risk, akin to gambling, with the goal of achieving substantial gains in a short period. Speculators often disregard the fundamentals of assets and focus on short-term market fluctuations.

Time Horizon

Investing is typically associated with a long-term time horizon, where investors buy and hold assets for extended periods, gradually building wealth. In contrast, speculation tends to be focused on shorter-term market moves, aiming to capitalise on short-term price movements.

Research and Analysis

Investors conduct comprehensive analysis of fundamental factors such as financial statements, industry trends, and macroeconomic indicators to make informed decisions. They utilise fundamental or technical analysis to choose investment strategies or design portfolios. Speculators, on the other hand, focus on technical factors such as price patterns and market trends to predict short-term movements.

Emotional Susceptibility

Investing is less susceptible to emotional decision-making, as investors tend to maintain a disciplined approach, even during turbulent market conditions. Speculation, due to its short-term nature, is more prone to emotional decision-making, as speculators react to market volatility.

Leverage

Investing usually does not involve leverage, while speculation often employs heavy leverage through margin trading to amplify potential gains. However, it is important to note that while leverage can increase profit potential, it can also significantly magnify losses if the market moves unexpectedly.

Income Generation

Long-term investments often generate passive income in the form of rent, interest, or dividend payments, which can boost wealth creation. Speculation, on the other hand, does not generate passive income, and traders must rely solely on price movements for profits.

Market Impact

Large-scale investments can stabilise the market by keeping volatility in check. In contrast, speculation, especially on a large scale, can lead to increased market volatility and the formation of asset bubbles.

Regulatory Scrutiny

While both investing and speculation are subject to regulatory scrutiny, speculation is often viewed more negatively due to its increased potential for losses and its ability to quickly destabilise markets.

In conclusion, understanding the difference between speculation and investing is crucial for teenagers to make informed decisions and choose the approach that aligns with their financial goals, risk tolerance, and investment horizon.

Learn about different types of investment accounts

There are several types of investment accounts that are suitable for teenagers. Here are some options:

• Custodial brokerage account: Minors are not allowed to own stocks, mutual funds, and other financial assets outright. In a custodial brokerage account, a parent or guardian supervises and controls the investments on behalf of the minor until they reach the age of majority (typically 18 or 21, depending on the state). It is important to look for online brokers that charge no fees for buying and selling stocks and have low minimum balance requirements. Some examples of brokers that offer custodial accounts include Charles Schwab (which now owns TD Ameritrade) and Fidelity.
• Roth Individual Retirement Account (Roth IRA): Teens with earned income from wages, salaries, tips, bonuses, taxable benefits, or self-employment can open a Roth IRA. This type of account allows teens to take advantage of tax-free growth and early retirement savings. It is important to note that a parent or guardian's involvement is typically required to open this type of account for minors.
• Joint brokerage account: In a joint brokerage account, minors share legal ownership of the assets with an adult. While investment decisions are generally subject to the adult co-owner's approval, this type of account may allow teenagers to take a more active role in managing their investments.
• Educational investment platforms: There are platforms and apps specifically designed to educate teenagers about investing and provide them with the tools to start investing. For example, Bumper is an investing platform for teens that requires a parent or guardian as a sponsor. TeenVestor is another educational resource that offers free materials for teens and their parents to learn about stocks, funds, the economy, and more. Additionally, there are games and simulations, such as MarketWatch Virtual Stock Exchange, Wall Street Survivor, and How the Market Works, where teens can create hypothetical portfolios and compete with friends.

Experiment with dummy portfolios

Experimenting with dummy portfolios is a great way for teens to overcome the fear of investing real money. Dummy portfolios allow teens to create hypothetical portfolios with fake money and compete with friends to see who earns the highest profits. This helps teens learn about investing without the risk of losing real money.

There are several websites that offer dummy portfolio services, such as MarketWatch Virtual Stock Exchange, Wall Street Survivor, and How the Market Works. These sites allow users to set up stock market games and track the daily values of their portfolios.

By using dummy portfolios, teens can gain experience in investing and build their confidence before investing their own money. It also helps them understand the basics of investing, such as stock symbols, company research, and financial data.

Additionally, teens can learn about different investment strategies and how to manage risk. They can experiment with different portfolios and see how they perform over time. This can help teens make more informed decisions when they start investing their own money.

Dummy portfolios are a great way for teens to get hands-on experience in investing and build their knowledge and skills in a safe and controlled environment. It allows them to make mistakes and learn from them without any financial consequences. Overall, experimenting with dummy portfolios can be a valuable step for teens interested in investing and can help set them up for success in their future financial endeavours.

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