Investing in the stock market is one of the most useful and accessible tools for building wealth out there. It can be incredibly passive and generate more wealth in the long term than you ever thought possible. This wealth-building potential can set you up for future success that just isn’t accessible to most people who wait to start. Investing for teens is powerful, not just for adults.
There just sadly aren’t enough resources out there to help guide investing in stocks for teens. Most information focuses on people with significant salaries who are contributing to 401Ks and grind a 9-5. However, these concepts are just as important when you are younger, even as a teenager.
This post will go over how and why to begin investing as a teenager. Or, if you are a parent, how and why to help your children invest as a teenager.
Stock Market Basics
To get started with investing, you need to have a foundation of knowledge on the stock market. Investing money in the stock market isn’t a game. It involves real money with serious consequences if it is treated with too little seriousness.
Now that we have the serious stuff out of the way, let’s start covering the stock market.
What Are Stocks and Shares?
Stocks are offerings to purchase portions of companies on the stock market. Shares are portions of these stocks which you buy and sell. Think of these shares as slices of a pizza, where you may buy 1 slice of pizza, but there are still 9 other slices owned by other people. In reality, most stocks are made up of millions of billions of shares, owned by many different people. All of these shares, or slices of pizza, comprise the ownership of a given company.
The only companies that appear on the stock market are public companies. This means that they are owned by the public as opposed to being owned by a select few private investors. The financials of these companies must also be made available to the public to make educated decisions.
All of these shares mean genuine partial ownership. It may sound silly, but when you buy one share of Apple, you now own .000000000062% of Apple.
Buying and Selling Stocks
The purpose of purchasing part of a company is to hopefully ride its future successes. In general, as a company performs better (increases revenue, reaches more customers, innovates, etc.) its share price will increase as well. This means that the portion of that company that you own is now worth more than you paid for it. This is always the goal of investing in the long run: pay less for a share of a company than you are eventually able to sell it for.
When you purchase a share, you are purchasing that share from someone else who decided to sell it at a given share price. This is the cost to purchase or revenue from selling one share of a given company. This price fluctuates often due to innumerable outside factors.
Don’t Sell Quickly
When you first think about buying and selling stocks, don’t think about them as quick buying and selling. Think of it as buying a good long-term company at a fair price, and planning to hold those shares for many years to come.
The issue with trying to quickly buy and sell, or trade, stocks is that prices are unpredictable in the short term. If a single farm supplying coffee to Starbucks is temporarily down, its share price may temporarily dip. Or if one of its drinks trends on Tik Tok, its sales could increase and the share price could temporarily increase.
In contrast, long-term investments are still uncertain, but far more predictable. You can feel quite confident that since Coca-Cola has been a good company for 50+ years, they will continue to be in the medium-long term future.
Even think about the market as a whole. The market has been increasing over the long term by ~10% annually for over 100 years. Barring a collapse of the US, you can rest easy assuming it will continue.
If you are interested in diving more into the fundamentals of the stock market, check out my post on the basics of the stock market.
Where to Trade Stocks?
Stock trading is done through a brokerage. Think of a brokerage as the middleman between you and the stock market. They handle your money, communicate with the market to purchase shares with your money and give you a place to view and manage those investments.
If you are over 18, this process is quite simple. Signing up for a brokerage is just about as easy as signing up for a Gmail. You just need personal info such as your address and social security number, which you can get from your parent. Please, let your parents know what you are planning to do. It is important for them to be aware of your plans so that they can help guide and support you.
I have an entire post covering the best online brokerages.
If you are under 18, then you will need your parent(s)’ assistance to open an investment account. The most common of these accounts is a custodial account. Teenvestor has a fantastic post covering custodial accounts here.
Why Invest as a Teenager?
You may have heard of compound interest. Compound interest is essentially interest building upon itself. If you start with $100 and earn 10% interest on it that year, you will have $110 at the end. This means that next year your 10% interest is worth more since 10% of $110 is greater than 10% of $100. This concept continues compounding indefinitely.
In the stock market, if you earn the average 10% return on your investments, then you will be compounding these returns over time. The more your investments are worth, the more interest you earn, increasing the value of your investments, on and on.
The real power of compound interest is in the very long term. The above example of an extra $1 on a $100 investment seems extremely small, but this is the short term. Think about 10 years from now. You may be planning to buy a house, get married, or any number of large purchases.
If you had left this $100 alone and not touched it for 10 years, assuming it gets the standard 10% return, you would have more than doubled your money to $259 without even touching it.
The earlier you start this process, the better. If you instead had an investment account 10 years earlier and started with the same $100, you would have $672. That is almost 7x your initial investment with zero input.
Compounding Increases Over Time
Notice that over the first 10 years, you increased your investments by 2.5x. Whereas in the second 10 years, your investments increased by an additional 4.5x. This is because the second 10 years of compounding was compounding on an already compounded sum of money.
This concept may seem confusing as I try to explain it. The important thing to understand is that the earlier your start, the better. Even if it is a seemingly small amount of money, you are giving compound interest more time to work its magic and earn you money.
Setting Yourself Up for Success
Early investing isn’t something that most people take advantage of. Some people simply aren’t in the financial position to be able to. However, there are many people out there who simply don’t realize it’s an option. Or don’t think that it’s worth their time.
By getting on the compounding train earlier rather than later, you are giving yourself a small nest egg to use in the future. Unexpected expenses happen to everyone: a house, medical bills, and rent between jobs. If you already have an account you have been investing saved money in, you have a significant amount of money to draw on when you need to.
This can save you from the horrors of not having the funds to cover a sudden expense. Don’t underestimate the long-term effects a situation like this can have on your mental and financial health.
It’s important to note that it is far more effective to hold investments for a very long time. So don’t invest any money you plan to pull out in less than a year or two.
Make Money While You Sleep
For the most part, stock market investments are quite passive. Especially compared to starting a side hustle or getting a part-time job, you can put in an incredibly small amount of effort in to reap the benefits. This low required effort makes investing for teens a great idea, as life is very busy with school and hobbies.
This consistent performance even happens as you sleep, and whether you pay attention or not. It is a best practice to keep an eye on your investments and not leave it on autopilot. But this amount of attention can be surprisingly low.
Don’t underestimate the power of having your money work for you, instead of having to work for your money. You will thank yourself when you have time to pursue other interests, with the peace of mind that you are growing wealth regardless.
If you’re interested in making your investments as passive as possible, check out my post on generating passive income on the stock market.
How to Invest in the Stock Market as a Teenager
All right, so get to how to do it already.
Follow these steps to get started investing in the stock market as a teenager.
1. Learn the Basics of the Market
Don’t dive into investing without knowing what you’re getting yourself into. As I mentioned before, this isn’t a game.
Every form of investment has a certain amount of risk, and that includes the stock market. You can mitigate this risk by diversifying and investing consistently, but it never goes away.
Learning about the mechanisms behind the market is the first step to avoiding this risk.
2. Open an Investment Account
As mentioned before, if you are younger than 18, speak with a parent about opening a custodial account. If you are over 18, sign up for a very reputable, large brokerage (post on brokerages).
This process should be very quick and simple.
3. Deposit a Small Amount of Money
Start with a very small amount of money that you are not afraid to lose. Most brokerages will even let you deposit as little as $1. The purpose of this initial investment is to become familiar with the brokerage’s process of trading stocks and tracking your investments.
A deposit will require the brokerage to link to a bank account of some sort. Make sure you have a personal account to link to. For safety reasons, it’s best to link it to an account with a relatively small amount of money. Speak with your parent, but it may be best to open a checking account under your name if you don’t have one, and only keep future investment funds in there.
4. Invest in the Overall Market
There are funds that track the overall market. These automatically diversify your account by investing in small amounts of very many stocks. The most common ones are VOO, SPY, and VTI.
Once you gain a better understanding of the market and different companies’ performances, you can look into individual stocks instead of funds. In the beginning, sticking with funds is the safest idea.
Purchase a partial share of one of these funds with your small deposit, and don’t sell it right away.
5. Hold Your Investment(s)
This is very important. If you sell stocks too quickly after buying them, you can be viewed as a risky investor and be punished by your brokerage. Plan on holding all of your investments for the foreseeable future.
Regardless of how the market performs in the short term, don’t sell. The power in the stock market lies in long-term investments. People who sell when stocks drop are those who lose money in the market. Those who stick it out and hold their investments are the ones who make staggering wealth in the future.
6. Make a Plan
This initial investment isn’t the end of your investing journey. The best way to plan for future success is to plan for future investments.
If you have your own income to work with, plan on recurring investments. A recurring investment is where you set up your account to automatically invest a set amount of money on a set interval into your desired stock. For example. Investing $50 per month into VOO. I cannot stress enough the effect this will have on your long-term success. You won’t have to remember to invest as it will happen automatically.
If you don’t have your own income, talk with your parent about whether they are willing to set up these recurring investments with their own funds. The important thing isn’t to invest a great sum of money each month, but to be consistent. Whatever they are comfortable forking out monthly is fantastic. You are investing to build long-term wealth, not stress your parents financially in the short term.
By starting to invest as a teenager, you are already far ahead of most people. You are setting yourself up to be financially successful in a way that most middle-aged adults aren’t even utilizing. The important thing is to follow the above 6 steps and watch the recurring investments grow your account over time.
Don’t be scared by market downturns. These happen, and the market has more than recovered from worse many, many times. Just let the market do its work and check on it periodically.
Eventually, once you get a stable job with a solid income, increase your recurring investments. Never to a level that you stress yourself financially or can’t sleep at night. But also, never let it sit stagnant as you get a raise or promotion.
If you have any questions at all, please let me know in the comments below. Also, let me know if you
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