Teenage Investing: What You Never Knew.
First Things First: What IS Investing?
In the words of our friends at Merriam Webster, invest (at least our form of it) means "to commit (money) in order to earn a financial return". In our words, investing is giving your money to an investing medium in the hopes that some day you'll get more in return. Investing is a complex world filled with an infinite number of ways to allocate your money. No one way is absolutely better than the other: all investment strategies have strengths and weaknesses. The key to success is to know what you're investing in and what you hope to achieve from your investment.
Investing is a smart way to make your money work for you. If you held on to $500 for thirty years, in thirty years you would still only have $500 (ignoring inflation). If you take that same $500 and purchase a EE savings bond from the government, over the course of thirty years the bond will earn interest. Assuming the interest rate stays fixed at .30 percent, in thirty years you can cash in your bond for $950. That is almost double what you would have if you just held onto the $500! This is the power of investing, and this is why you should invest your money. Even as a teenager with limited income, the principle of investing stays the same. Whether you have fifty dollars or one thousand dollars, you can put your money to work.
What do I Invest In?
This is the part where you get some options. It's important to have a goal and a time frame, as this will help you determine what investment is the best for you. After that, you need to decide on your risk tolerance, that is, the amount of chance you're willing to take on your investment. More risk often precedes more reward, but it can also mean you risk losing money. No investment can be one hundred percent, but some are safer than others. There are four major investment types: bonds, stocks, mutual funds, and commodities. Generally speaking, bonds are the safest while commodities tend to be the riskiest.
Remember that piece of paper your grandma gave you instead of the cash you would've preferred? That was a bond. Your grandma loaned the government ten dollars on the agreement in five years they would give you twenty. Bonds are considered a safe, risk-free investment. As long as your government doesn't collapse, your money is safe and you will get it back. Bonds make great investments for people with a low risk tolerance looking for long term investments (bonds have an early cash-out fee that cut into your earnings). However, their low risk makes them low reward. Unless you purchase a rather large bond, you aren't likely to get rich off the interest. Your money is still working for you though, and even earning an extra twenty-five dollars is money you didn't have before. As a teen, it's a good low-money investment you'll be happy you made in ten years. It may not seem like it now, but relinquishing a pair of fifty dollar jeans is worth the ability to buy three pairs of the same jeans in the future.
Stocks are the most famous of investments and are usually the first investment type in a new investor's mind. Stocks are a tricky trade, and I don't recommend diving in head first. To be successful in stock investments, knowledge is power. Thoroughly research the company you plan to invest in and review their most recent quarterly report with the SEC. Are they profitable? Will they continue to be profitable? No one can predict the future indefinitely, but with a little experience and practice you'll be better able to predict if a company is worth your money. Stocks are a high risk investment, which makes them a high reward investment (starting to notice a pattern?). Stocks can be a short or long term investment, though they are much better equipped to handle short term goals than other options. Stocks should be monitored closely, as you assume the risk of losing all your money if you aren't careful. For a teen, I think it can be a good investment to help finance some short term goals, as long as you remain vigilant. Stocks are not something that you should be lazy with. Also, do not expect to invest in big name companies that leave lights in your eyes. Although they have excellent track records, their stocks sell for hundreds per one share, leaving you lucky to even own one. Smaller, cheaper stocks are better for the young investor.
Comparison of Bonds to Stocks
Long Term Investment
Both Long and Short Options
Mutual funds are my personal favorite in investments, and perhaps one of the best options for teens and adults alike. Mutual funds are accounts in which you pool your money together with other investors with similar goals to your own and all of your money is managed and invested by a professional. The professional will buy a variety of stocks and bonds based on the wishes of the investors.There are fees associated with mutual funds however (professionals have to eat right?) , so those fees should be paid close attention to. A high fee does not guarantee a high return. In fact, there's absolutely no correlation between high fees and high returns. Don't allow yourself to be sucked into an expensive fund without good reason. Mutual funds are a good investment; they spread your money across both stocks and bonds. They are perfect for investors who feel they don't have the time and expertise to get the most of their money in the market. For teens, it really depends on your income. If you have the money and are looking for a longer investment, you certainly won't be disappointed, but for a tighter budget you might be better off managing your own account.
Last, but certainly not least, there are commodity investments. Commodity investments are investments such as gold and real estate. Commodities are a high risk high reward investment. They are not recommended for beginner investors at all. Commodity investments often require some special knowledge, and if you don't have it, you certainly have a lot to lose. For teens, I do not recommend it. You likely don't have the necessary capital, and even if you did, you likely lack the special knowledge needed to succeed. Your money is better spent elsewhere.
How to Get Started
Now that you have the basic idea of investment types and how they work, getting started is the easier part. There are many online trader sites such as eTrade which will help you get started trading. If you're more interested in bonds, a trip to your bank will prove fruitful. Whichever route you go, and whomever you trade with, take care to invest wisely and always remember: If it looks to good to be true, it probably is.