Teach Your Teen the Art of Investing
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Teach Your Teen the Art of Investing
Like all other aspects of money management, the more you can expose your teenager to during these years, the better off she'll be. If you've instilled in your teen the habit of saving, then it's time to introduce her to the world of investing.
For anyone young (who can afford to wait before withdrawing the money), the stock market is well worth investigating. Historically, stocks have outpaced bonds and “safe” investments, like certificates of deposit (CDs), money market funds, and U.S. Treasury bills. (Your biggest market risk is if you have to pull out your money unexpectedly, when the market is low.)
From 1926 through 1995, stocks returned an average of 10.5 percent per year, compared with 5.2 percent from long-term government bonds and 3.7 percent from U.S. Treasury bills. Inflation over that same period averaged 3.1 percent a year—meaning that after taxes, only stocks have significantly enhanced purchasing power.
Creating a Portfolio
When it comes to money, you never put all your eggs in one basket, so diversification is the first rule to teach your teen. The two of you should talk about how much she has in her savings account and decide how much to pull out for investing; you might suggest that 20 percent is a good amount. This leaves the majority of her savings in an accessible, guaranteed instrument (her savings account) and takes only a portion to put into the higher promise but higher risk of the stock market.
Now comes the fun part. In what company would your teen like to invest? You're in relatively safe hands here, try to relax. If she's permitted to “buy what she knows,” she's likely to choose Coca-Cola, McDonald's, Disney—all good solid “blue chip” stocks.
If your teen has ever played poker, she'll know the derivation of the term “blue chip.” Like the more valuable blue chips used in poker, this market term is used to describe the stocks of the largest, most consistently profitable companies.
After your teen expresses an interest in a particular stock, more research is necessary. She may love a particular type of computer and want to buy that stock, but if the company is having difficulty in its foreign division or other performance problems, you'll want to learn that now. Show her the steps you can take to check out a company:
- Call the company for a copy of the annual report; it will tell her about what goals the company has set and how well it has met them.
- Visit the library and take a look at Value Line Investment Survey, Moody's Handbook of Common Stocks, or S & P Reports, any of which will provide some insight into the company's track record and how the analysts feel about it.
- The online services (such as the World Wide Web, the Internet, or America Online) also offer a wealth of financial information. If you subscribe to one, investigate what information is available to you online.
If there doesn't seem to be any bad news the company is sweeping under the carpet, then go for it!
Explain to your teen the basic concept of the stock market—that it was created so the general public could invest money in companies in which it believed (and possibly gain financially as a result), while the companies benefited by having additional cash to invest in their business.
The price of stock rises and falls based on supply and demand. When demand is high (for example, when a company announces good news), shares of stocks can command a higher price because they're harder to come by; when demand is low (based on bad news), the prices drop.
Opening a Brokerage Account
Whether you deal with your own broker, contact a discount broker, or purchase stock through one of the new online services, you will need to set up an account with your teen. The process is much like opening a bank account.
Until your teen is 18 or 21 (depending on your state of residence), any brokerage account you set up must be a custodial one. Though you'll conduct all transactions, you can set up the account using her social security number for tax purposes. (Remember, too, that legally she'll have access to this money the moment she turns legal age, so don't use the account to stash anything you don't want her to have when she's 18 or 21.)
When you make your stock purchase, ask the broker for how the company is listed and on which exchange (if you haven't already picked up that information in your research).
And if the commissions (the amount charged by the firm that buys or sells the stock for you) seem high compared to the size of the investment, chalk it up to “education.” If you're fortunate, the money will grow and the commissions will seem smaller as the account grows bigger.