5 Steps to Start Investing as a Teenager

Time gives teenagers a significant advantage over those who begin their investment journey later in life. Albert Einstein once stated, “Compound interest is the eighth wonder of the world.” “He who understands it earns it; he who does not, pays it.”

Compounding’s potency stems from its long-term impact. The longer you let an investment compound, the more valuable it will become.

Teens can take advantage of compounding interest for a longer length of time, potentially increasing their wealth by the time they retire.

This guide will help teenagers and their parents (most states need you to be 18 to open a brokerage account) get started on the path to wealth creation through investing. Choosing the right direction is critical because it allows a kid to maximize the benefits of compounding interest.

The 5 Steps to Start Investing as a Teenager

Anyone, including teenagers, can start investing with relative ease. Follow these five simple steps to embark on an incredible lifetime adventure:

  1. Learn the fundamentals of investment.
  2. Find out your investment identity.
  3. Discover the right investments for you.
  4. Open and fund a brokerage account.
  5. Make your very first investment.

1. Learn The Fundamentals of Investment

Investing, like any new activity, can be intimidating at first. However, once you understand the fundamentals of the stock market and how to invest in stocks, it becomes rather simple. Read as much as you can about investing so you understand how it works, what pitfalls to avoid, and the best techniques to use. Also, check out our book, The Motley Fool Investment Guide for Teens.

2. Find Out Your Investment Identity

Discovering your investing identity is a key step in the process. Are you a risk taker? Then growth investment could be exactly up your alley. Do you enjoy getting paid (and who doesn’t?). Consider income stocks. Do you enjoy a fantastic deal? You might be a value investor at heart.

As you learn more about investing, you will discover what interests you the most, which is essential for staying engaged over time and reaping the benefits of compound gains.

As a teenager, you’ll most likely take one of two approaches to investing: active or passive.

If active investing isn’t for you, don’t give up. Instead, devote some more time to researching passive options like mutual funds and index funds, which track stock market indices.

When it comes to risk tolerance, there is no wrong answer. However, if you fail to identify your identity and take on more risk than you can handle, you may make poor, panicky decisions when circumstances are tight.

There’s a lot to gain by continuously investing in an index fund and calling it a day. In the long run, they will perform an excellent job of boosting your wealth.

3. Discover The Right Investments for You

If you get the investment bug, understand how to research stocks. Then, choose a few companies that interest you (investment or otherwise) and begin researching them. Discover how it produces money, how much it can grow, and where it may expand in the future.

Examine its financial statements to determine whether company has the flexibility to withstand the expected economic downturns. Go through this procedure with companies you like and narrow it down to a list of those you wish to buy.

4. Open and Fund a Brokerage Account

When you’re ready to begin investing, open and fund a brokerage account. Anyone who is at least 18 years old can open an online brokerage account. Children under that age will require the aid of a parent.

Parents can open a brokerage account on their teen’s behalf or establish a custodial account. The procedure is relatively straightforward and typically takes less than 15 minutes. If you have earned income, a Roth IRA for kids is an excellent way to begin investing.

5. Make Your Very First Investment

Once the funds have cleared in your brokerage account, you can make your first stock purchase. Decide which stocks on your list you wish to buy and place the order. We propose placing a market order to make the transaction.

When you are ready, place the order during market hours. Before you know it, you’ll be the happy owner of a small portion of what you think to be a great firm, or, if you prefer passive investing, a basket of outstanding companies.

Now repeat the process to create a diverse portfolio. Continue to deposit monies into your brokerage account and purchase additional shares of the firms or index funds you wish to hold in order to maximize the benefits of compound interest over time.

How Parents Can Start Investing for Their Teens

Parents can play an important role in encouraging their teenagers to begin investing. They can best accomplish this by encouraging them at each stage of the process. If you are an experienced investor, show them the ropes. If not, study alongside them.

Guide them in discovering their own identity, which may be very different from your own. Your kid has decades of investing ahead of them, whereas you have a shorter remaining investment horizon.

They can afford to take on greater risk, such as investing in specific stocks that excite their interest, even if it means going through more difficult times. Encourage them to find what interests them the most so that they will continue to invest when times are rough, which we all know will come.

Help them open a brokerage account, but don’t do it for them. You want them to take ownership and initiative so they can keep investing. Also, it wouldn’t hurt to start them out with a gift deposit in their brokerage account. You could even offer to match a percentage of their future deposits for a few years, similar to a 401(k) employer match.

The role of time in compounding gives teens an edge, therefore parents should encourage their children to begin as soon as feasible. They may moan at first, but they will eventually appreciate you for guiding them toward financial independence.

Learn The Hard Lessons Together

It’s been a crazy few years for investors. firms have ridden a pandemic-fueled roller coaster, weathered the so-called “meme stock” frenzy in which particular firms jumped and fell for no apparent reason, and, most recently, investors have been forced to deal with the uncertainty generated by growing inflation.

Such volatility can be frightening for even the most experienced investor. For teenagers and anyone who are new to investing, it might be terrifying. It is critical for parents to encourage their adolescents keep focused on the long term and remember that while it is difficult to predict how stocks will move on any given day over time, equities have traditionally increased in value.

Investing for Teens FAQs

How can a teenager invest $1,000?

Teens have time on their side and don’t need to be overly forceful. If an 18-year-old invests $100 in the S&P 500, it will be worth $88,197.49 by the time they reach 65, given the index’s historical average 10% rate of return. Teens have plenty of time to make errors and learn from them, so they should not be scared to take risks or engage in their hobbies. Just be open to learning from your mistakes as you go!

When can a teenager start investing?

To invest in stocks, you must be at least 18 years old, however there are methods to start much earlier. An adult can open a custodial account on a kid’s behalf, which will be legally transferred to the child when they reach 18.

How can I invest if I am under 18?

The simplest approach for a person under 18 to trade stocks is for an adult to register a custodial account with a brokerage on behalf of the kid and then invest in stocks on the child’s behalf, with the youngster guiding the investments if desired. When the child reaches the age of 18, the account and its investments are automatically transferred to them, and they can make future investment decisions.

What investments can minors make?

A minor can invest in the entire market, as well as cryptocurrency and other asset classes, using a custodial account. It is difficult to find a brokerage that will enable a kid to invest unless an adult opens an account on their behalf.

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