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A Teen Guide to Investing in Stocks and ETFs
The rise of investment apps has brought the possibility of trading to even the most novice fingertips. With stocks becoming more accessible, your teen may wonder how they can start making some money on the market.
However, some experts caution that it’s important to discuss the basics of personal finance with your teen before getting into investments. Claudia Gonzalez, a financial advisor with Kovar Wealth Management, says, “Once the teen is old enough to have a checking account, open one. Explain to them how a debit card works in connection to their checking account.”
Getting them comfortable talking about money and understanding their finances creates a good foundation for other financial topics, like investing in stocks, the benefits of a Roth IRA and the importance of account monitoring to keep track of their investments. Then, once your teen is ready to start investing, it’s your job to help them learn the ropes.
1. Start by buying a stock
If you’ve been investing for a while, you may not be interested in individual stocks. They can be riskier and less predictable than the index funds many of us use for our long-term investments. However, Gonzalez suggests single stocks are a better starting point than exchange-traded funds (ETFs) or mutual funds. “It’s ‘cool’ for them to say, ‘I own [stock in] Apple, Amazon or Google, which makes it more fun for them,” she says.
Starting with an individual stock that appeals to your teenager is effective for a couple of reasons. Not only does it make them feel proud when they support that business, but it may also hold their interest better too. Part of your investment conversation should include monitoring stocks, and it’s more fun for a teenager to check in on a brand they know and love. And don’t be afraid to start with just one. In the beginning, investing with your teen should prioritize learning. Building the foundation of their knowledge on a stock that they feel personally motivated to follow can guide their learning and encourage them to learn about changes in value.
2. Go over the rules of the game
The minimum age someone can open a brokerage account is 18. That means your high schooler can’t go and get started on their own. Instead, the parent or a guide will need to open the account. It’s important to remember that whether you trade with your child on your account or open a custodial account on their behalf, you are ultimately responsible for the choices they make — and that includes any losses.
For this reason, you shouldn’t share your password with your teen. Instead, guide them in understanding the impact of their decisions and play an active role in monitoring their choices. Finally, your teen should know that this isn’t like playing Monopoly: the dollars they invest can disappear. Setting a budget for total investments and price per share is a good starting place. You can also set boundaries for their overall risk.
3. Enjoy the money talk
Learning about investing is also an opportunity to engage in a dialogue with your teen and develop shared financial beliefs. “As with learning any skill, investing starts with developing a philosophy: What do you believe in as an investor, and how do you prefer to go about hunting for pieces to fill a portfolio?”, says Rob Isbitts, Founder and Chief Investment Strategist at Sungarden Investment Research and Founder of The Hedged Investor. You might also make the conversation more interesting by talking about how personal finances and investing impact you as a family. In fact, you could tie their savings and investments into a reward by getting them to start thinking about long-term financial goals.
4. Challenge them by setting goals
For a more practical approach, you can try out goal-setting with your teen. Setting goals for stocks and even retirement plans gives your teen something to look forward to and helps base their investments in a bit of reality. You might try discussing what your teen’s goals are first. Do they want to go to a private college? Buy a house before they’re 30? Maybe you can help them start thinking about a Roth IRA for their retirement. Discussing medium- and long-term goals can help you and your teen put a dollar amount and due date on their dreams, serving as yet another form of motivation.
5. Move on to low-cost funds
You can think of stocks as the appetizer to the main course: financial markets. This is a good time to start talking about low-cost funds like EFTs. While not as flashy as individual stock in your teen’s favorite company, as you begin to diversify what you talk about financially with your teen, make sure the difference between investment types is clear.
[ From Trent: How to Convince Your Teens to Care About Finance ]
- Individual stocks: Individual stocks represent a share of ownership in a company. Owning stock in a company means that you own a fraction of it. Investing in an individual stock is like putting all of your eggs in one basket: it’s risky when you have needed money on the line.
- Exchange-traded funds (ETFs): An ETF is a set of stocks you can buy and trade. Because many brokerages charge for each transaction you make (buying and selling), an ETF is a lower-cost option. With each transaction, you effectively buy all of the fund’s value. Because index funds are, by definition, diversified, they are a less risky investment option, although perhaps not as lucrative as a lucky solo investment.
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