How To Invest as a Teenager

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Investing as a teenager is a great way to get ahead when it comes to building a nest egg. If you can manage to invest as little as $100 per month starting at age 16, by the time you’re 65, you could have over $1 million in your account if you can achieve a 9% annual rate of return. But if you were to wait until age 40, you’d have to sock away nine times as much to reach the same goal.

There are a few cautions to investing as a teenager, however. If you’re under 18, for example, there are certain types of accounts you’ll have to open with an adult. You’ll also have to dedicate yourself to learning the basic principles and strategies of investing in stocks or other options so that your long-term plan will be successful. While it’s all well and good to sock away $100 per month, if you don’t understand how to invest, you may actually end up losing that money instead of building a seven-figure nest egg. 

To help you avoid that scenario and to help make your investing career as successful as possible, here’s a look at the most important things you need to know as a teenage investor. 

Basic Investing Principles

According to Financial Industry Regulatory Authority or FINRA, which is the non-profit regulator overseeing the securities industry, this is the basic information that all beginning investors should know:

• Stocks: Shares of stock, also known as equity, represent ownership in the company issuing the shares.
• Bonds: Bonds, also known as debt securities, represent a loan to an issuing entity. In exchange for the risk of the loan, the issuer pays you interest plus the return of your initial investment after a stated period of time.
• Mutual funds and exchange-traded funds: Mutual funds and ETFs may contain dozens or even thousands of individual securities, such as stocks, bonds or other investments, which are managed by professional investors. Mutual funds are bought and sold directly with the issuer, while ETFs trade on the open market just like stocks. 

FINRA also outlines the steps beginners should take to start their investment careers: 

1. Define Your Investment Goals

Some investors invest exclusively for growth, while others need income. Oftentimes, a combination of the two makes sense. But as a young investor, you’ll likely lean towards growth investments, as you don’t need income to live off and you have enough time to recover from any stock market selloffs.

2. Select an Investment Time Frame

You should divide your investment goals into short-, medium- and long-term. The longer your investment goal – such as retirement – the more aggressive you can be with your portfolio. If you have a short-term goal, such as saving money for your summer vacation, a high-yield savings account, CD or other conservative investment is likely a better choice.

3. Learn how to Be Patient

Trying to” get rich quick” in the investment world usually leads to disaster. The best recipe for long-term success is to invest consistently and take advantage of compound interest, which pays you interest upon interest. For example, if you earn a 10% return on a $1,000 investment, you’ll earn $100, for a total balance of $1,100. But if you keep that money invested for another year at a 10% return, you’ll earn $110. Over time, compound interest can really add up – but you have to be patient to earn it.

4. Crawl Before You Run

It’s usually best for teenage investors to start slow and even use a mock portfolio to understand how markets work. 

5. Start Saving for Retirement

Once you get a job, ask about your company’s retirement savings accounts. A tax-deferred retirement plan like a 401(k) can be one of the best ways to boost your long-term savings. While you won’t encounter one at age 16, by the time you’re in the workforce, it pays to understand how they operate. 

6. Continue to Educate Yourself

Before you invest your money, you should fully understand what you’re buying, both in terms of its expected return and potential for loss along with any fees or other expenses you might have to pay to own it. Basic concepts like diversification, which can reduce the risk in your overall portfolio, are essential to understand. 

Types of Investments

While teenagers shouldn’t pour all of their money into a single stock, they are young enough to ride out the ups and downs that are typical of the stock market.

For their long-term savings, therefore, they should consider a stock-heavy allocation. As volatile as the stock market and individual stocks can be, the S&P 500 has actually never lost money over any rolling 20-year period. As teenagers likely have 40 to 50 years before they retire, they can afford to take these risks.

Exchange-traded funds can be another good option for teens. Most ETFs track popular indexes like the S&P 500 or the Nasdaq Composite, and this can be a great way to “own the market” in a single investment. 

Risk Management Strategies for Teens

The best risk management strategy if you’re a teenaged investor is to start slow and not put all your eggs in one basket. While it might be exciting to own a high-flying stock like Nvidia, if the stock has a sharp correction, which is highly likely with stocks that have posted astonishing returns, you could end up losing a big chunk of your money.

How To Open an Investment Account for Teens

If you’re under age 18, you can’t own a financial account all by yourself. But there are two primary ways you can still open an account:

Use a Custodial Account

Also known as a Uniform Gift to Minors Act (UGMA) account, this account will be in the name of an adult parent or guardian, but you will be listed as the beneficiary of the account.

Open a Youth Account

These accounts are offered by firms like Fidelity. While still requiring an adult signature, this account allows kids 13 to 17, to save and invest with no account fees or minimums. This account comes with a no-fee, cash-back debit card, global reimbursement of ATM fees and access to a brokerage account for investments.

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