Mar 6, 2021
min read

A Beginner's Guide to Investing as a Teenager

Are you yearning to yield income as a teen? Got you covered!

There are a plethora of reason to start investing, but what happens to your money over time by default if you don’t?

Due to inflation, your money will lose value over time (around 2.5% per annum in the last twenty years). If you were to stash ten thousand bucks and not look at it again for the next 10 years, by the end of those 10 years, so the value of the money would’ve fallen drastically.

Even if you were to put the money in a savings account, you would still be technically losing money since according to the FDIC, the average interest rate on savings accounts currently stands at 0.05% APY. Then what should you do the stop losing money over time?

If hypothetically, there was a savings account that could give us an annual return of 10%(this would never happen since 10% is way too high for a savings account), every year you would make 10% of the value of the in your savings account.

For example, if you were to put the same $10,000 in the savings account, the value of the account would be $11,000 in the first year and $12,100 in the second year and so on. By the end of the 10 years, your savings account would have grown to $25,937.42, of which $ 15,937.42 is the total interest earnings. So you would’ve more than doubled your money just by investing it in the hypothetical account.

Unfortunately, savings account with 10% returns do not exist in actual life because that would be way too high compared to the current returns offered by banks which is around 0.05% APY. So then what options are we left to achieve this magical ROI?

That’s where investments come in. Investments are a broad term that encapsulates stocks, bonds, mutual funds, index funds, exchange-traded funds (ETFs) as well as real estate investments.

For teenagers, buying real estate is not a viable option since it requires a huge capital, that’s where stocks and shares come in.

So what is a stock or share?

To put it simply, it is part ownership or a “share” of the company in which you are investing.

There are two ways that you can make money while investing in stocks:

  1. Capital Gains are the revenue from the sale of an asset such as equity, debt or real estate properties. The capital gain occurs as the asset’s sale price tops the purchase price. It is the difference between the selling price (higher) and the cost price (lower) of the asset.
  2. Dividends refers to a bonus a corporation pays to its investors, whether as cash or otherwise. Dividends may be given as stocks, cash or any other form. The dividends of a corporation are largely determined by its Executive Board and must be approved by the shareholders.

That all sounds good, but the question is how should you decide which shares to buy? Well, you shouldn’t invest in individual stocks as a beginner. Why? because you are exposed to an immense risk since you cannot easily predict which companies will continue to grow and which will eventually bust. Instead, you should invest in index funds at the initial stage of your investing journey.

Index Funds

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500) which is an index of the biggest 500 companies in the United States.

To put it simply, Multiple investors give a sum of money to an index fund manager, who decides in what portfolios the fund is going to invest in. This is a win-win situation for everyone since the investor doesn’t have to worry about where to invest their money and the index fund manager takes a 1-2% management fee.

Why should you invest in Index Funds?

  1. Index Funds are really easy to invest in. When beginners want to start investing, the biggest hurdle they face is analysing which stocks to buy. Index funds already do that for you.
  2. Low management fees. Since there’s no “real” person managing the fund, and instead its a computer algorithm calculating what stocks to buy, the fees are extremely low. An actively managed fund would require more fees than a passively managed one.
  3. Diversification. There are all sorts of companies in the S&P 500 ranging from the tech sector, the oil sector to the clothing sector, hence the risk of losing money is minimised.

How do I buy shares?

You find an online broker, you can just search up “Best brokerage in XYZ country.”

Once you’ve selected the brokerage, you have to make sure all the legal paperwork is done and once that’s done you can start putting in a little amount of money initially and get yourself acquainted with the market and you can start the journey of being more financially responsible.

When should I start investing?

Typically, investment plans require a long-term timeframe. Keeping that in mind, the best time to start investing is as soon as possible. The sooner you start to invest, the sooner your assets would grow.

In general, these investments will be used to finance your retirement. So starting as quickly as you can is a smart idea. You will get plenty of time to build up your wealth through your investments.

Investment is a crucial part of your financial journey. However, before you start investing, you should keep some things in mind.

  1. Pay off debt. You should first focus on finishing off your debt. Once you’ve paid down your debt, you’ll be able to invest more comfortably.
  2. Start an emergency fund. It’s not a comfortable thought to live paycheck to paycheck without having financial security. if you start young, then the power of compounding can work in your favour. Even if you only have a few dollars to start investing, you should take action today.
  3. Don’t invest any money you might need in 3-5 years.

Why do stocks price fluctuate?

The stock market functions similarly to an auction. Individuals, corporations, and governments may all be buyers and sellers. When there are more sellers than buyers, the price of a stock drops. When there are more buyers than sellers, the price rises.

The performance of a corporation has no direct impact on its stock price. The response of investors to a stock’s performance determines how it will perform in the future.

Selling Stocks

Knowing when to sell stocks is just as crucial as knowing when to purchase them. Most investors buy when the stock market is rising and sell when it is dropping, but a wise investor executes a strategy based on their financial necessities.

Maintain a close watch on the key market indexes. Don’t be surprised if the stock market falls. These occurrences usually don’t last long, and history has proven that the market will rise again. Losing money is never fun, but it’s advisable to ride out the storm of a down market and hold on to your assets in the because they may rise again.

The Bottom line

You should start investing as early as you can even if you don’t have a large sum of money to do so since you can slowly build up your portfolio over time.