1. Teaching Financial Literacy to Teens: Introduction
  2. Teaching Financial Literacy to Teens: Making Money
  3. Teaching Financial Literacy to Teens: Budgeting
  4. Teaching Financial Literacy to Teens: Credit and Debt
  5. Teaching Financial Literacy to Teens: Cars and College
  6. Teaching Financial Literacy to Teens: Account Reconciliation
  7. Teaching Financial Literacy to Teens: Investing
  8. Teaching Financial Literacy to Teens: Moving Out
  9. Teaching Financial Literacy to Teens: Conclusion

There are many 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, which can include:

  • Bonds – Debt investments where you lend 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) 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 one 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 – Investments that are 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). 
  • Individual Retirement Accounts (IRAs) – An investing tool used to earn and earmark money for retirement savings. Saving for retirement may be a tough sell, but it’s never too early to start. Contributions can only come from income your child earns through working. Traditional IRAs reduce taxable income by the amount of the contribution; Roth IRAs don't provide this break, but can be withdrawn tax free at retirement. Both types of investment grow tax-free and can increase significantly over the years because of the power of compounding. (For more, see The Benefits of Starting an IRA for Your Child.

The Power of Compounding

The last point brings up how essential it is to teach your children about the power of compound interest. The younger someone is, the more time they have to take advantage of this almost magical effect. That's where being a teen really helps. Even a tiny IRA started in the teen years can multiply substantially. For example, over 50 years, a single $1,000 deposit earning 5% a year will grow to $12,119. Consider matching your child's contribution to an IRA fund. (The contribution limit for 2018 is $5,500, and the key limit is that your child can only contribute as much as they earned that year.)

Understand Risk

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 – and those 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 can invest) and age (younger people can withstand greater risk that people who are retired). (For related reading, see Calculating Risk and Reward.)

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 combination of stocks, bonds and cash savings. The goal of diversification is to balance riskier investments with safer investments to limit overall risk while still giving your money a chance to grow.

Fundamental vs. Technical Analysis

Investors use fundamental and technical analysis to make buying and selling decisions for stocks and other investments. While most investors prefer one method over the other, some use both types of analysis to evaluate potential investments.

Fundamental analysis uses data to evaluate the value of a security, such as a stock. Fundamental analysts look at figures and financial ratios including earnings, earning-per-share (EPS), price-earnings ratio (P/E) and dividend yield. A company's fundamentals can be found on various financial news sites such as Investopedia and Yahoo! Finance. The following example shows financial information for Facebook (FB) found on Investopedia. (For more, see Introduction to Fundamental Analysis.)

 

 

Technical analysis, on the other hand, evaluates historical price and volume data to predict future price movements. Where fundamentalists look at financial numbers, technical analysts view price charts and technical indicators, such as the one shown in the following daily chart of Microsoft (MSFT). The red bars indicate days where the stock's opening price was higher than the closing price; the green bars indicate days when the closing price was higher than the opening price. The wavy line that appears over price is a well-known technical indicator called a moving average. (For further reading, see Basics of Technical Analysis.)

 

Chart created with TradeStation.

Where to Begin?

Investing is an excellent way to build wealth, but it takes time and effort to learn how to do it wisely. Low risk investments, such as certificates of deposit, are a great way for teens to start. As they gain experience, they can branch out to other higher risk investments – such as stocks and ETFs. Anyone can get started investing, and it doesn't take a ton of money to make it worthwhile. Because of the power of compounding, even small investments can grow substantially over time.

There are many apps that can help teens invest. Stash, for example, offers a selection of about 30 ETFs with various risk levels (conservative, moderate and aggressive) – plus they can invest automatically with the optional Auto-Stash feature. (For related reading, see Investing 101: A Tutorial for Beginner Investors.) The key is to start investing – and to make saving and investing a regular part of your budget. 

 

 


Teaching Financial Literacy to Teens: Moving Out
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