How to Invest as a Teenager – Getting an Early Start
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Investment is nothing but putting money into something that will generate a financial return in the future. It is one of the best ways to build wealth and start saving for financial goals, right from the dream home to a luxurious holiday or retirement. A lot of us start investing as adults but investing as a teen can give a head start on saving and learning personal finance. It also gives an opportunity to grow more wealth thanks to compounding interest. The sooner you start investing, the longer you will have the money working for you.
Let us consider an example to understand the importance of compounding. Imagine a 16-year old who begins investing at $200 a month in a brokerage account with a 10% annual return. If they continue to invest the same amount until the age of 50, through compounding interest, they will have more than $1.4 million saved. But if someone starts investing the same amount at the age of 30, they would have less by the age of 60. This money can help pay for education, marriage, home, or travel.
Through investing, it is possible to prepare financially for the future and also learn about financial literacy. When you help your teen build their financial knowledge from a young age, it will also help them feel more confident about money in the future. It may sound complicated when you have no experience and expertise about the subject but it is easier than you would think to get started. Both parents and teens can benefit from investing as a teenager. Here is a complete guide to getting you started in investing as a teenager.
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What teens can invest in
With several investment options to choose from, there are varying risk levels and it can become difficult to identify where to start from. Here are the most common investment options available for teens.
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High-Yield Savings Accounts
A basic way to get your teen to start earning a return on their money is through a high-yield savings account (HYSA). They have been around for a long time and several financial institutions now offer high-yield savings accounts, which have a high-interest rate as compared to the standard accounts.
When you choose a high-interest savings account, the funds will grow more than they would in a basic savings account. Unfortunately, even high-yield savings accounts have low rates of returns as compared to the other investments. But the risk is low as the money up to $250,000 remains insured by the Federal Deposit Insurance Corporation.
Related: Best High-Yield Savings Accounts
Certificates of Deposit
A certificate of deposit (CD) is similar to a savings account. You can earn interest on the savings in the same manner but the key difference is that the CDs will require you to keep the money in the account for a specific period of time to earn the promised rate of interest.
At the time of maturity, you can redeem the CD and get the money back with the interest you earned on the account. It is also a risk-free investment as the money remains insured by FDIC but the only drawback is that the money will remain locked up for a long period of time.
Stock market
Investing in individual stocks is a great way to own a piece of a company. It is known as equity and when you buy the stock, you become a part-owner of the company. You can earn money through capital appreciation when the stock value increases and through dividends that are paid out to the shareholders. You can pick one or two stocks to learn how to evaluate the stocks.
Start with a few top growth stocks until you get familiar with the way the stock market works. If you do not want to put all the money into a stock, you can consider fractional shares. Stocks are volatile assets and they can go through major price shifts in little time so when you are a beginner, do not invest a lot of money in them.
Bonds
A form of debt security, bonds are low-risk and when you buy a bond, you are lending money to the government or the issuing company. They are stable and can help build a diversified portfolio. They provide fixed income in the form of interest payments that are made through tenure.
Mutual funds
Funds including mutual funds and exchange-traded funds are very popular today. They allow you to get exposure to different securities through a single investment. They are basically pooled investments that are handled by professionals on your behalf. ETFs can be traded like stocks throughout the day but mutual fund orders are settled at the end of the day.
Related: Best ETFs
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Steps to start investing
Here are the steps you must follow when you start investing as a teenager.
Opening an investment account
Children below 18 years old can open a custodial account to start their investment journey. In this type of account, an adult is a custodian who will open an account and invest money for the child. Once the child is an adult, they can take full control of the account. All the assets in the custodial account will belong to the child legally and the custodian remains a placeholder until the child reaches the age of adulthood. Hence, the money put into the account cannot be taken back and belongs to the child.
Types of custodial accounts:
- Uniform Transfers to Minors Act. This account will hold stocks, mutual funds, bonds, real estate, and cash.
- Uniform Gifts to Minors Act. This account will hold financial assets like mutual funds, stocks, cash, and bonds.
- Individual retirement account. Through this account, you can start retirement planning before teens reach adulthood.
Get stock knowledge
The next step for teen investors is to understand the basics of investing. If you do not have the knowledge and understanding of the different types of investments, you could run the risk of losing whatever little money you have started your investment journey with.
Identify the interests
You need to choose stocks based on your risk appetite and interests. When you look for stocks you have an interest in, you are more likely to be engaged in trying to understand how the market works. To begin with, you need to get a copy of the annual report of the company you want to invest in. This is the starting point to understand how the company is performing. An annual report is a document that is used by public companies to disclose information about their stock. It is a company report which has all the details about the performance of the company including the future programs. If you are keen on investing in mutual funds, you need to understand the allocation of the fund and identify if it meets your requirements.
Understand the financial data
It helps to get complete information about the financial performance of the company and compare it to similar companies in the same industry. There are different performance measures but you do not need to calculate them by yourself. You will find all the information in the financial reports of the company and you can also use different websites like MarketWatch and Morningstar to get the data for any company.
Consider robo-advisory services
If you are not sure how to go about investing, you can consider a robo-advisor. Several investment platforms offer their services and they make the process of investment easier and quicker for you. Based on your goals and risk appetite, the robo-advisor will choose the stocks to invest in and they will automatically rebalance the portfolio from time to time.
Related: Best Robo Advisors
Choose the right online broker
As a minor, one cannot own mutual funds, stocks, or other financial assets outright. Hence, you can only make investments through a custodial account and under the supervision of your parents. The parents can sign you up for a custodial account that is offered by an online broker. However, it is important to note that only a few brokers offer custodial accounts. You can own the assets and the parents will control the investments in them. When choosing an online broker, remember to:
- Watch out for brokerages that have no stock trading fees.
- Choose low-balance stock trading accounts so you do not have to worry about maintaining a sizeable balance in the trading account.
- Look for brokers who allow fractional investing so you can invest as low as $1 in promising companies with high stock prices.
Here are some online brokers you may want to consider:
- Charles Schwab. Charles Schwab offers complete investing solutions including custodial accounts. It has zero commissions on stocks and options.
- Robinhood. Robinhood is ideal for beginners but the only drawback is that it does not offer custodial accounts which means you will not be able to open an account for your teenager.
- Betterment. Betterment is a robo-advisor ideal for those who are not hands-on into investing. However, it also does not offer custodial accounts and will not serve your needs.
- Fidelity. Fidelity is similar to Charles Schwab and also offers custodial accounts. It is very similar to Charles Schwab in terms of cost and services.
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Things to keep in mind when investing as a teenager
Avoid it if it is too good to be true
Whenever you start investing, be wary of what you are getting into. Compare the interest rates or the promised returns with the well-known stock indexes. If the investment promises you more than the available indexes, it is very risky. Taking risk is not a bad thing because it is a chance for you to make more money but you must know how risky it is before you invest in it.
Do not get caught in the high guaranteed return
A lot of fraudsters do spend time trying to convince the investors that the investments will offer guaranteed high returns. If the company is not well known and you are offered a high return which is guaranteed, you need to watch out. There is no guaranteed profit and if it sounds too high, you might not be aware of the risk involved.
Don't invest if you don't know the company
Whether you choose to invest in stocks or the mutual fund, if you have never heard of the company, adviser, or brokers, you must spend time checking them out before you make the investment. You can check out the electronic filings of the company to help research the advisers. Do your homework before spending your money.
Being pressured to invest right away
When there is an emergency, run as fast as you can. A lot of scam advisers have a tendency of making you think that if you do not act right away, you could miss out on a fabulous opportunity. However, in reality, you can take all the time you want and do the homework before investing. Whenever there is pressure to invest, just say no.
An investment you do not understand
A lot of con artists use big words and phrases to impress you. But if you do not understand an investment, you should not buy it.
Understand the income tax liability
The investment income earned on the custodial account, which is the interest, earnings, or dividend generated by the account assets will be considered as the income of the child and this will be taxed at the kiddie tax rate after the child is 18 years old. In case the child is younger than 18, the first $1,050 will be tax-free and the next $1,050 will be taxed at the child’s rate.
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The bottom line
A lot of people do understand that they should be investing money but not many have understood the benefits of starting in high school. When you get your child started in their teens, you can help them build wealth and prepare for the future while also providing them with financial literacy that will allow them to succeed in life. Choose the best investments keeping the long-term goals in mind.
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Writer
Vandita Jadeja is a financial writer and editorial assistant at Joywallet. She loves to read and write about money and brings 7 years of experience from the financial industry. She loves coffee, mountains and sunsets.
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