As teens learn more about money, they may become curious about investing, especially after all the hubbub about GameStop’s recent stock price surge.
Short selling stocks (the way some investors did with GameStop) can be risky. But learning about investing as part of a long-term financial strategy may help put your teen on a path to financial success in the future.
Where to Start
Your teen may not have given much thought yet to investing for retirement or even for future purchases such as a home. But you may want to explain that teens who start investing money have long time horizons. That means that time is on their side because they won’t need the money for years or even decades. If a teen’s investments take a hit one year, they have time to recover before they actually need the money. Thus, teens typically don’t have to buy or sell investments quickly.
As you’re teaching your teens about investing, it’s important to explain that money that’s invested has the potential to grow more quickly over time than money that sits in a savings account or a certificate of deposit. It’s true (and good for your teen to realize) that investments can also lose value. However, over the long term, a well-diversified investment portfolio (meaning a set of investments that includes multiple types of assets) has the potential to increase in value.
Investment Types Your Teen Should Know
Next, you may want to discuss a few different ways that your teen can invest.
Stocks
A stock is partial ownership in a company. Companies sell shares of stock to investors as a way to raise money.
Investors (also called shareholders) may trade with each other, buying and selling shares of the companies they own. If most investors think a company will do well in the future, they’ll probably buy more shares, and the price of the shares will increase. If most investors think a company will do poorly, they’ll likely sell shares, causing share prices to fall.
Keep in mind that the stock price matters only when you buy or sell. But selling stock isn’t the only way to make money from your investment. Some companies pay dividends, meaning they distribute some of the profits to shareholders, generally four times a year. You might describe it as a quarterly allowance the company pays to shareholders.
Mutual Funds
Rather than representing one company, the way a stock does, mutual funds include a group of stocks from multiple companies. This gives investors access to a more varied portfolio, but shares of a mutual fund can be bought and sold like stocks.
A mutual fund is run by a professional manager and staff. This team of professionals pick stocks they believe will perform the best based on certain criteria such as high earnings or growth potential. The team also decides when to buy or sell certain stocks within the mutual fund portfolio to try to keep it performing well.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (or ETFs) have recently become a popular alternative to mutual funds. They-re similar to conventional mutual funds in that both represent an investment in a collection of securities. the primary difference is how they are bought and sold. ETFs are traded on an exchange throughout the day, like stocks. Mutual fund prices are calculated once a day after the close of the market. Learn more about ETFs.
Bonds
A bond is technically a loan to the bond issuer that must be repaid to the investor eventually. Bonds can be issued by governments, states, counties, cities, school districts, churches or other organizations.
Depending on how stable the issuer is, bonds can potentially seem like safer investments than stocks. Most younger investors don’t invest heavily in bonds because their investments usually are long-term and have more time to absorb the normal ups and downs of the market. But as an investor gets closer to retirement, more of his or her portfolio is likely to shift toward bonds, since they’re a more conservative choice than many other investments.
Any of these investments can be held within an Individual Retirement Account (IRA) or a non-retirement (taxable) account. An IRA is a special kind of account that’s specifically designed for retirement savings and is subject to special rules. For instance, you can get some tax advantages from an IRA but you can’t take money out of it early without penalties. A non-retirement account may be more flexible, especially for teens, who may have shorter-term goals.
Managing Expectations
As a final reminder, all investors should bear in mind that past performance doesn’t guarantee future performance. That includes teenagers!
Teens may not have much experience with investing, but they’re probably experienced movie watchers. How many times has your teen seen a sequel to a favorite film that wasn’t as good as the original? But then sometimes there’s a series in which each new film is even better than the last one. You just can’t predict which will be the case, and the same is true with investing.
Get tips to teach your children money basics in our Financial Literacy for Teens series.
Next Steps
Helping your teen understand the basics of investing now prepares him or her for the future. For more information on starting your child or teen’s financial education, check out Raising Financially Aware Kids.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.