Teaching Financial Literacy To Teens: Investing
There are lots of ways to invest money, but the goal is always the same: to grow your money. Many teens are interested in learning about the various types of investments they might make, these can include:
- Bonds - A debt investment where you loan money to a government or a business for a defined amount of time and at a fixed interest rates. Bonds are issued by companies, municipalities, states and federal governments to finance a variety of projects.
- Certificates of Deposit (CDs) - An insured (no risk) time deposit with a bank. When you open a CD, you agree not to use the money for a specific period of time (from a few months to many years) and you earn interest. You can withdraw your money early but will have to pay a penalty (such as the loss of X number of month's interest).
- Exchange Traded Funds (ETFs) - Uniquely structured investment funds that track indexes, commodities and baskets of assets. ETFs trade just like stocks on regulated exchanges, and ETF prices fluctuate throughout each trading session in response to market events and investor activity.
- Mutual Funds - An investment that is made up of a pool of funds collected from lots of investors to invest in securities including stocks, bonds and money market instruments.
- Stocks - A type of investment that signifies ownership in a company. The value of a stock changes throughout the day. If the price goes up, the value of your investment increases; if the price falls, the value decreases (this assumes the stock was bought; you can also sell short a stock and profit by falling prices).
An essential concept to discuss with your teen is risk. Risk deals with the possibility that an investment could lose some of its value. Investments with the most risk also tend to have the highest returns; conversely, investments that are low-risk tend to have low returns. Finding the appropriate balance between risk and reward is important in developing an investment strategy or portfolio. That balance will differ from person to person, depending on factors such as risk tolerance, account size (how much money you have to invest) and age (younger people can withstand greater risk that people nearing or in retirement).
Diversify Your Investments
One of the best ways to reduce your overall risk is to diversify your investments (the proverbial, "Don't put all your eggs in one basket.") Diversification is a risk management technique that mixes a variety of investments within one portfolio (a portfolio is a combination of stocks, bonds, and cash savings). The goals of diversification is to balance riskier investments with safer investments to limit overall risk.
Fundamental and Technical Analysis
Investors use fundamental and technical analysis to making buying and selling decisions for stocks and certain other investments. While most investors subscribe to one method over the other, there are some who use a combination of fundamental and technical analysis to evaluate investments.
Fundamental analysis uses data to evaluate a security's (such as a stock's) value. Fundamental analysts will look at figures and financial ratios including earnings, earnings-per-share (EPS), price-earnings ratio (P/E) and dividend yield. A company's fundamentals can be found on various financial news sites. The following example shows information for Microsoft (Nasdaq:MSFT) found on Yahoo! Finance:
Technical analysis, on the other hand, attempts to predict future price moves by evaluating historical price and volume data. Where fundamentalists look at a lot of numbers (such as shown in the above chart), technical analysts view price charts and certain technical indicators that help interpret price. The following chart, for example, shows the daily price activity for Microsoft. The red bars indicate days where the stock closed down for the day (i.e., where the stock's opening price was higher than its closing price). The green bars indicate days where the stock closed up for the day (when the closing price was above its opening price). The wavy line that appears over price is a very well-know technical indicator called a moving average. A moving average is used to help discover trends in price.
|Chart created with TradeStation.|
Where to Begin?
Investing is an excellent tool for generating wealth, but it can also leave people broke. As such, it is important to learn about investing (do your homework!) before making any decisions. Making "safe" investments - such as certificates of deposit - is a great way to get your feet wet without risking money.
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