Compounding, they say, is the eighth wonder of the world. It’s a quote attributed to Albert Einstein. If you are a teenage investor, consider yourself lucky. That’s because you have many years to live, which means your investments can grow and compound for decades if you invest early and leave the investments alone.
Let’s assume that you open a Roth IRA when you are 18 and invest $1,000. Assuming a 10% annual return, your Roth IRA will grow to $88,000 when you are 65. But if you open a Roth at 30 and invest the same $1,000, you will have $28,000 when you are 65. That’s the power of compounding over time.
What you should know before investing as a teen
Age requirements
You have to be 18 or 21 years old to invest in the stock market or in real estate. You can open a custodial brokerage account with your parent or guardian before 18 and start investing.
Discuss with your parents
Your parents have more investing experience than you. They probably have 401{k)s and have experience buying a house and saving money. Your parents may have relationships with a financial advisor or a real estate broker and may be able to introduce them to you.
A good financial advisor will guide you through the process of investing for the long term. Don’t listen to friends. Most people like to invest in the next big thing or meme stocks. They will not be able to guide you effectively.
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Investment opportunities for teenagers
Stocks
You can purchase stock through a brokerage such as Robinhood or Charles Schwab. When you buy a stock, you get small ownership in a company. Note that you are not entitled to the company’s assets, but you get to participate in the company’s fortunes through its stocks. Stocks generally appreciate when a company does well.
ETFs
Buying stock in one or a few companies is risky. The company may go bankrupt and you may lose your money. ETFs or Exchange Traded Funds consist of many stocks but trade like a single stock. This allows you to spread your risk across many stocks. ETFs could cover a certain country or a certain sector of the market.
Mutual funds
Mutual funds are also a bundle of stocks but you can’t trade them like stocks. They can only be bought and sold at the end of the day. Mutual funds typically have investment minimums and higher management fees compared to ETFs.
Real estate
Real estate is an asset class that has created a lot of millionaires. Real estate allows you to invest in homes, apartments, and even land. Compared to stocks, real estate needs cash upfront.
Most people start by buying a single-family home and renting it out. You collect rent every month and use that money to make mortgage payments. The home appreciates over time. You can sell the property down the road to buy another property.
How to get started investing in stocks
Choose a budget
When you start investing, start small, A few hundred dollars is a good start. The goal initially is to get comfortable with the investing process.
Open a brokerage account
Open a brokerage account at Robinhood, Fidelity, or any other broker. Choose a broker that has no monthly minimums and fees.
Make your first stock purchase
Do your research and buy your first stock. It’s a big milestone in your investing career. It’s the first of many investments you will make.
Monitor your portfolio
After you purchase the stocks, get familiar with the volatility of the stock. Read the news related to the stock and follow its quarterly and annual earnings.
Bottom Line
Investing as a teenager has many advantages. You have time on your side and even a small investment will grow into thousands as its compounds over time. Your goal as a teenager is to get started early and learn the investing process. You will make mistakes but you will also learn. Investing early will set you up for financial success.