Investing 101: High Schoolers' Guide To Starting An Investment Fund

Investing is a crucial skill for high school students to develop, as it will help them make informed financial decisions that can impact their future. While minors cannot open a brokerage account, they can own stocks under their name and have custodial accounts (UGMA accounts) or Roth IRAs opened in their name by a legal guardian. High school students can also start investment clubs to gain insight and experience in the world of finance, including trading simulations and hearing from guest speakers. Understanding the basics of personal finance and creating a financial plan are essential steps before investing.

The Legalities of Investing as a Minor

Minors can own stocks in their names, contrary to popular belief. However, they cannot open a brokerage account as they cannot sign legally for themselves. A minor's signature cannot be accepted by transfer agents to complete any transactions. Therefore, minors must have custodial accounts (UGMA accounts) opened in their name, with a parent or guardian acting as the custodian. The assets (stocks) held in the account are in the minor's name, but the custodian can conduct transactions on their behalf until they are of legal age to do so themselves.

Minors can also have a Roth IRA if they have earned income. A parent or guardian must act as the custodian until the child is of age, and other relatives can also contribute to the Roth IRA on the child's behalf.

In the case of India, a minor is an individual under 18 years of age. A minor cannot invest in India on their own account but can do so through a natural guardian (parent) or court-appointed guardian. A minor can invest in stocks and mutual funds in India, but the accounts will be operated by the guardian.

In the US, two types of custodial accounts are used for establishing investment accounts for minors: one under the Uniform Gift to Minors Act (UGMA) and the other under the Uniform Transfer to Minors Act (UTMA). The type of account opened depends on the state of residence.

How to Save and Invest

Saving and investing are important for achieving financial success and security. By planning ahead, you can work towards financial goals such as buying a car, having an emergency fund, purchasing a house, or retiring comfortably. Starting early allows you to take advantage of compound interest, which can significantly increase your savings over time.

• Pay yourself first: This means setting aside a portion of your income for savings or investments before anything else. Consider automating your savings by having your bank automatically transfer money from your paycheck into a dedicated savings or investment account.
• Understand the basics of investing: Investing is putting your money into various assets, such as stocks, bonds, mutual funds, or cryptocurrencies, with the goal of growing your money over time. You don't need a finance degree to invest; you can educate yourself through research and seeking advice from experts.
• Decide how much money you have to invest: Create a budget to understand your income, expenses, and how much you can comfortably set aside for investing. It's recommended to have an emergency fund covering around six months' worth of living expenses before investing.
• Understand your risk tolerance: Investing involves risk, and some investments are riskier than others. Know how much risk you are comfortable with and how much money you are willing to potentially lose. Diversifying your investments across different sectors and risk levels can help manage risk.
• Choose an investment account: You can invest through a brokerage account, which allows you to buy and sell various assets without penalties. There are also specific types of accounts, such as savings accounts, certificates of deposit (CDs), or money market funds, each with its own advantages and disadvantages.
• Know your investment options: Familiarize yourself with different investment options such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and index funds. Each has unique characteristics, risks, and potential returns.
• Diversify your investments: Don't put all your money into one type of investment or one company. Diversifying your portfolio helps reduce risk and provides a cushion if certain investments perform poorly.
• Do your research and understand the risks: Before investing, make sure you understand the risks involved. Some investments, like high-growth stocks or cryptocurrencies, can be very volatile, offering high potential gains but also a higher risk of loss. Always invest only what you can afford to lose.
• Get advice and stay educated: Seek advice from experts, friends, or family members with investment experience. Stay informed about the market and the companies you invest in. Remember that investing is a long-term game, and short-term losses don't necessarily mean you've made a bad investment.

The Basics of Personal Finance

Personal finance is a crucial aspect of financial freedom and success, and it involves creating a long-term financial plan that includes budgeting, saving, and investing. Here are some essential concepts to understand when it comes to personal finance:

• Understanding compound interest: Compound interest is the interest earned on the initial amount of money deposited as well as the interest accumulated over time. This concept is essential in understanding how your savings or investments can grow over time.
• Pay yourself first: This means prioritising saving or investing a portion of your income before spending it on other things. Automating your savings by setting up direct deposits or utilising employer-sponsored retirement plans like a 401(k) can make this easier.
• Diversification: Diversification is a risk management strategy where you spread your investments across various assets, industries, or geographies. By not putting "all your eggs in one basket," you reduce the potential impact of any single loss.
• Credit card management: Credit cards can provide convenience and build credit history, but they also come with high interest rates if balances are not paid off in full each month. It's important to use credit cards wisely and avoid excessive debt.
• Financial planning: Creating a financial plan involves setting short-term and long-term goals, such as saving for a car, emergencies, or higher education. It also means considering your current financial situation, including any income, expenses, and liabilities.
• Understanding risk: Different investment options come with varying levels of risk and potential returns. Generally, higher-risk investments offer the potential for higher returns, while lower-risk options tend to provide lower returns but with more stability.

When it comes to investing as a high school student, there are some additional considerations:

• Legal limitations: Minors can own stocks under their name but cannot open a brokerage account. Custodial accounts, such as UGMA accounts, can be opened by legal guardians, allowing them to conduct transactions on the minor's behalf until they reach legal age.
• Retirement accounts: High school students with earned income can open a Roth IRA, which is a tax-advantaged retirement account. This can be a great way to start saving for the future, and contributions can be made by the student or their parents/guardians.
• Investment options: High school students can explore various investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and high-yield savings accounts. It's important to understand the risks and potential returns associated with each option before investing.

The Pros and Cons of Different Investment Types

There are hundreds of types of investments, and they all fall into what are known as asset classes. The most commonly cited four types of investments are stocks, bonds, funds, and cash. Here are the pros and cons of each:

Stocks

Shares of ownership in publicly-traded companies, which can rise or fall in value depending on the performance of the company and the overall stock market.

Pros:

• If the stock goes up, you can sell it for a profit.
• Some stocks pay dividends to investors.
• Stocks tend to offer higher potential returns than bonds.
• Stocks are considered liquid assets, so you can typically sell them quickly if necessary.

Cons:

• There are no guaranteed returns.
• The stock market can be volatile.
• You typically need to hang onto stocks for many years to achieve the highest potential returns.
• You can lose a lot of money or get in over your head if you don't do your research before investing.

Bonds

Loans made to corporations or governments that pay a fixed interest rate and can be bought and sold on the bond market.

Pros:

• Bonds offer regular interest payments.
• Bonds tend to be lower risk than stocks.
• Treasurys are considered safe investments.
• High-yield bonds tend to pay higher returns and they have more consistent rates.

Cons:

• The rate of return with bonds tends to be much lower than with stocks.
• Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.
• Bonds can decrease in value during periods of high interest rates.
• High-yield bonds are riskier and have a higher risk of default.

Mutual Funds

These investment vehicles pool money from various investors to purchase diversified portfolios at a slightly higher cost than ETFs.

Pros:

• Mutual funds are easy and convenient to buy.
• They are more diversified than stocks and bonds, so they carry less risk.
• A professional manager chooses the investments for you.
• You earn money when the assets in the mutual fund rise in value.
• There is dividend reinvestment.

Cons:

• There is typically a minimum investment you need to make.
• Mutual funds typically require an annual fee.
• Trades are executed only once per day at the close of the market, which means you can't buy or sell mutual funds in real time.
• The management team could be poor or make bad decisions.
• You will generally owe taxes on distributions from the fund.

Cash

Cash is not technically an investment, but it is recommended to have between 2% and 10% of your portfolio in cash.

Pros:

• Cash is the most liquid of all investments.
• It can be used to take advantage of lucrative opportunities as they appear.

Cons:

• Cash does not offer any returns.
• Keeping too much cash can reduce your overall returns.

How to Start an Investment Club

Starting an investment club is a great way to learn about investing and gain experience in the world of finance. Here are the steps you can follow to start an investment club in high school:

Find a Faculty Adviser and Gain Approval:

Follow your school's process to find a faculty adviser and gain approval for starting a new club. This typically involves applying for club status and outlining a budget and operations plan.

Recruit Club Members:

Advertise your club heavily, especially in math, economics, and other quantitative classes. Highlight the benefits of careers in finance, such as the potential for quick advancement up the pay scale with just four years of undergraduate studies.

Elect Club Leadership:

Once you have a group of members, focus on introductions, team-building, and electing club leadership. This will help ensure that everyone feels included and engaged, and it will also take some of the responsibilities off your shoulders as the founder.

Provide an Overview of Investing:

Start your official club meetings by giving a broad overview of the field of investment. Cover basic concepts and vocabulary, such as what the stock market is, what a stock represents, equity, ways to trade, strategies, indicators, and reputable places to do research on stocks.

Assign Informational Materials:

Reinforce the information by assigning informational videos, books, or articles for members to watch or read between meetings. Some recommended resources include the Bill Ackman video, Warren Buffett's shorter video, the book "The Intelligent Investor," and articles on "How to Choose Stock," "Portfolio Diversification," and "Stock Exit Strategies" from the High School Investing website.

Engage in Current Events and Debates:

Encourage critical thinking and engagement by discussing timely events and news related to the finance sector. Allow for respectful debates, as members of your club may hold different political beliefs.

Bring in Guest Speakers:

Invite guest speakers, such as community members, local business leaders, or connections of the school or club members, to share their knowledge and experiences in the world of finance and investing. This will provide your club members with diverse perspectives and a glimpse into the real world of finances.

Consider Stock Trading Simulations:

One of the most popular elements of high school investment clubs is stock trading simulations. Since trading actual money through a school club can be complex, consider using online programs that simulate the real stock market, such as Investopedia, Wall Street Survivor, or Market Watch. These platforms allow members to participate individually or in small groups and even compete against other high school investment clubs.

Explore Funding Opportunities:

While rare, some established investment clubs have secured donations or funding from alumni or local businesses to invest with. If you can demonstrate a successful track record through simulations, you may be able to explore this option.

Give Back to the Community:

Incorporate a service project into your club's activities. For example, you could give a talk at your school about saving for college or starting a retirement account, or visit a local elementary school to talk about opening a savings account. This will not only share your knowledge with others but also demonstrate your club's dedication and commitment to giving back.

Frequently asked questions