An investment guide for teens

If Correspondent

Experts say that teenagers and people who may not yet be of legal adult age should invest for a variety of reasons. The biggest advantage is the time they have to let their investments grow and expand in value. It might be confusing sometimes from where to begin, but it need not be as young people can start their investment journey with the help of a variety of strategies and tools. In this article, International Finance outlines the key information that teenagers should be aware of before investing.

Some people might believe that those who are not yet considered legal adults should not invest. However, there are no age restrictions for investing, unlike at a casino or a pub. Although opening a brokerage account typically requires that you be at least 18 years old, investors under the age of 18 still have a variety of options available to them, though they may need to work with an adult or receive varying levels of supervision.

The importance of investing early

Younger people have an advantage over older people beyond simply being permitted to invest; simply put, the earlier you start investing, the more time your money has to grow. The force of compounding increases this early-mover advantage for younger investors. Starting to invest while time is on your side is even more advantageous since when you reinvest your capital gains and interest to produce more returns, the value of your account may increase.

A little example will help to highlight the benefits of starting early. Say you start saving for your retirement when you're 22 years old and start your career. When you reach retirement age, you would have $710,810.83 if you consistently saved $100 each month and earned a respectable 10% return on your investment (compound yearly). However, if you had begun investing when you were 15 years old, you would now have $1,396,690.23, or almost twice as much.

Riley Adams, a CPA and prominent authority on teen investing, is the creator and publisher of the popular website Young and the Invested. He believes that supporting young people's financial empowerment begins with educating them about the advantages of starting investments early.

"The one thing, the last true edge in investing, is really time in the market," Riley Adams explains. People who realize this edge and begin to take advantage of it sooner in life increase their chances of financial success.

Custodial accounts

A minor's investments in a custodial account are managed by an adult on their behalf until they reach 18 or 21 years of age, depending on the state in the USA. Custodial accounts are an excellent way to transfer assets to a kid or teen under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), but the custodian adult retains the legal obligation and the final say in 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. Although investment decisions are typically subject to the approval of the adult co-owner, there are joint brokerage accounts that permit minors to share legal ownership with an adult. These accounts may encourage younger people to play a more active role in society.

Are you ready to invest?

The advantages of investing while you are young are clear enough, but some teenagers might still be unsure about their readiness to make the plunge. When deciding whether to make their first investments, teens may want to ask themselves the following questions: Do you have money from a job or another source that you won’t need to access immediately? Can you afford to lose this money if your investments do not play out as planned? If you are under the age of 18, do you have a parent or another adult willing to help you invest? Do you know what you are getting into? In other words, do you understand the investment you are considering and how it works?

Riley Adams claims that companies that teens deal with frequently can pique their interest in investing. Purchasing stock in a well-known corporation is a smart approach to entering the stock market while adhering to the maxim "invest in what you know."

"Being engaged with companies you see on a regular basis gets you interested, makes you want to understand how they tick, how they grow, how they make decisions. And then once you kind of understand that, digging a little deeper and asking the question of:

Do I think this is good, do I think this is going in the right direction, and then do I have money that I want to invest in it?" he said.

The risk of investing

Younger people should be aware of the benefits of making frequent and early investments, as well as the risks. It goes without saying that the biggest disadvantage of investing is the possibility of losing some or all of your money. While it is impossible to escape the reality of potential losses, you can control how much risk you are willing to take on by choosing investments that are riskier than others. Generally speaking, a riskier investment has a higher potential to yield higher returns.

All investors, young and old, must understand this trade-off in order to choose a strategy. But once more, being young has its benefits. Younger investors may afford to take more risks since they have more time to stay in the markets, which increases their potential gains. Younger investors have time to wait for the markets to rebound when the inevitable market downturn occurs.

This explains why conventional investment wisdom recommends taking more risks when pursuing distant goals while becoming more cautious as you get closer to the moment when you'll need to access your funds. However, no matter your age, it is important to discover your own style as an investor, ensuring that you are okay with the level of risk you’re facing.

"People have different risk tolerances, and I think you need to be honest with yourself. If someone walks you through the logic of ‘You’re young, you should take on risk, you should let it grow’—but you just don’t feel comfortable with it, you absolutely should not do that. You should look for lower-risk investments that might not have as much upside but also might not have as much downside," Riley Adams advises.

Where teens can invest in

Once you have an understanding of your own risk tolerance, you can look into investments that have the qualities you think will best enable you to achieve your objectives. Here are a few of the more popular investment types, or asset classes, that you might choose to buy, depending on what you hope to achieve and when.

Stocks

A small portion of ownership, or equity, in a publicly traded corporation, is acquired when you purchase a stock. Two possibilities exist for stocks to generate income: Many businesses give their shareholders payments known as dividends. The market's assessment of a company's value affects stock prices, and if the price of your stock rises, you may be able to sell it for a profit. Stocks can be risky due to their value fluctuations, or volatility as it is known in the market. It is possible that you will end up with shares that are not worth what you bought for them if the firm you invested in starts to struggle. Stocks are a good investment for younger people with better risk tolerance because of the higher potential profits that come with them.

Funds

While stocks represent a share in a single company, you can also buy shares of funds that invest in

Share of social media users invested in the stock market

Other investments

Source: Statista

In the United States, as of January 2023 multiple stocks and other types of assets. Mutual funds are managed by qualified money managers and invest in a variety of assets in accordance with a prospectusstated goal. Exchange-traded funds (ETFs) are similar to mutual funds in that they possess a variety of investments, but unlike mutual funds, they may be exchanged on the stock market and are intended to track a particular market index, industry, or other assets.

Younger investors have access to many benefits through funds. Funds provide builtin diversification because they combine numerous investments into one. In other words, investors automatically possess a variety of assets through a fund, protecting their investment from total loss in the event that one component loses value. While some mutual funds have high fees for managing the portfolio actively, passively managed and index-tracking funds typically have low fees and a track record of generating good returns, especially over the long term.

Bonds

Bonds are an example of a debt instrument, as opposed to equity or ownership in a corporation. When you purchase a bond, you are essentially lending money to the bond issuer, who promises to repay you with interest and the principal you borrowed. Governments and corporations both issue bonds. Bonds are regarded as fixedincome investments as they offer predetermined payments over a specific time frame. They are especially helpful for investors who want to make a consistent income. They are less risky than stocks, though, and as a result have lower potential returns, which makes them unsuitable for young investors looking for long-term gain.

Some young investors could be better suited to other financial asset classes. For instance, certificates of deposit (CDs) let you invest money and earn a fixed interest rate over a set period of time. Similar to savings accounts in operation, CDs offer a greater interest rate because you commit to leaving the money alone for the duration of the investment. Compared to stocks or bonds, CDs are more conservative and have a smaller potential return while having a more moderate risk profile. There are yet more prospective investments on the list. From highrisk cryptocurrencies to derivatives including futures and options, there are plenty of ways to put your money to work. These products are better suited for experienced investors rather than those who are just starting because they are riskier and more complicated.

The bottom line

When it comes to investing, teens have the advantage because they have time on their side, even though they will need to work with a parent or another adult before investing. Teenagers have the chance to start accumulating their wealth early, thanks to custody accounts and joint accounts.

editor@ifinancemag.com