A growing number of young people are being drawn into the world of investing. Stock investment can be a terrific way to reach your financial goals and develop long-term wealth if you have the right knowledge to develop a successful stock trading strategy. For teenagers, it’s especially appealing, given it’s an exciting and novel opportunity to earn money and learn while doing so.
According to a survey by Fidelity, 73% of teens said that they had started educating themselves on trading and investing.
Making a return on your investments is of course the greatest benefit of investing. But investment can also teach teens how the corporate world and financial markets operate and provide significant learning experiences that can allow you to gain useful knowledge in all aspects of your life.
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The very first step of your investing journey will be to open a brokerage account. If you’re under the age of 18, a custodial account can be opened by a parent or guardian and transferred to you once you reach legal age. Once you’ve got your account opened, now comes the exciting part: the investing itself.
To unlock all those benefits we were talking about, you’ll need a solid strategy. Below are tips for teenagers looking to maximize their strategy and embark on a successful stock trading journey. (For more info on teens and investing, see my article Four Steps for Teens Who Want to Test the Investing Waters.)
1. Get educated.The stock market is a complicated system, and it’s easy to become confused by all the various terminologies and ideas. By starting with the fundamentals, you can create a strong knowledge base that will enable you to make wise financial decisions.
Do your homework before buying any stock. This includes investigating the business, its finances and its rivals. To better comprehend the environment in which the company operates, you should also conduct research on the sector and the larger market.
A few of the basic components you should research include:
Financials. What is the company’s revenue, earnings and profit margin?Management. Does the company have a strong vision? Who is in charge of the company, and do they have a good track record?Competition. Who are the company’s biggest rivals? How does the company look in comparison to its rivals?Industry trends. What are the trends in the industry, and how is the company positioned to take advantage of them?Investing can be done in many different ways, but some popular methods include buying stocks in firms with strong growth prospects, buying dividend-paying equities or building a diversified stock portfolio. All options can provide great returns, just make sure that you understand what you’re putting your money toward.
2. Know the risks.Stock investment involves risk, and it’s critical that anyone interested in investing — especially teenagers — understand this. There’s always a chance of losing money when investing in stocks because their value might go up or down. Market volatility is a major danger and a barrier for many to start investing. If you’re unprepared, fluctuating stock values in response to events outside of your control could lead to substantial losses.
In spite of these risks, stock investment remains a smart financial decision for teens. By consciously choosing stocks with growth potential as well as diversifying their investments, teenagers can reduce risk and increase potential returns.
3. Start out small.When just starting out in stock trading, it’s critical to only invest what you can afford to lose. Investing small amounts allows teens to get comfortable with the markets and learn the ropes without the risk of significant losses.
As time passes and you gain experience and confidence, you can gradually increase your investments. Start by investing a small amount of money in a few different stocks to get a feel for the market and to see how different stocks perform.
4. Set goals.It’s difficult to find value in stock investing if you don’t know what you’re looking to gain, especially as a first-time trader. Teens should ask themselves what their goals are with investing: Are you looking to build long-term wealth? Save for a specific goal, like buying a car? Generate passive income while attending school?
Goal-setting can help reduce risk by limiting exposure to individual stocks or sectors that may experience a large amount of volatility. It’s important to remember that stock investing is a long-term process and to be realistic about your goals to avoid risky behavior and disappointment.
5. Make a plan and stick to it.Teenagers should set a plan for their investments and stick to it, even when faced with volatility in the market. It’s easy to get caught up with market hype or to buy and sell stocks based on emotions.
But avoiding these impulsive decisions and staying disciplined enable teens to stay on track, achieve their goals and find long-term success. Creating an investment strategy and sticking to it is extremely important for young and learning investors who might not have the insights gained from years of trading experience.
6. Track your investments.Once you’ve put your money into certain stocks, it’s critical to monitor those investments and see how they respond to the markets with time. Tracking your investment enables you to view your progress, make informed decisions and adjust your strategy as needed. This helps you to stay on track to achieve long-term goals.
Remember that investing is a long-term process, so remaining patient is essential. Avoid getting caught up in the market’s brief oscillations. Instead, concentrate on the potential for long-term growth of the businesses you are investing in.
7. Consider apps or online resources.If you’re a teenager looking to learn more about investing in stocks, there are plenty of resources available online to grow your knowledge and give you the tools for success.
Invstr Jr, an app that’s designed to teach young people about the stock market and investing in a fun and engaging way, is a great resource to consider. The app includes easy-to-understand educational content to grow financial literacy and enables users to practice investing without risking any real money, providing teens with a risk-free opportunity to learn the basics. There are other apps that are great resources for teens, too, such as Plynk and Acorns.
Investing in stocks can be a great way for teenagers to gauge their interest in the markets and to achieve their financial goals. Teens can build long-term wealth, save for specific goals and generate passive income. However, it’s essential to start with the basics, set realistic goals and develop a sound investment strategy.
By doing your research, staying patient and sticking to a plan, any teen can gain the knowledge and confidence to make informed investment decisions and find long-term success in the markets. Happy trading!
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.