Investment Strategies For Kids
There are a few different options and investment strategies that work well for young adults who are just beginning their investing journey:
1. Investing in Stocks
One avenue to get started is to invest in individual stocks. Trading stocks can be a fun way for a child or teen to pick companies they like to invest in. Hopefully, going on to watch those companies grow and distribute dividend payments.
However, stock trading also has a decent amount of risk.
If you dont have enough funds to build a diversified portfolio of stocks for your child, you may risk picking a couple of losing companies.
2. Investing in Index Funds or ETFs
My preferred method to invest, especially for beginners, is to invest in an index fund or exchange traded fund .
Index investing allows you to invest in hundreds or thousands of investments with just one purchase of one fund. Youre still investing in the stock market, but you are doing so more efficiently.
You could also diversify beyond just one fund by building a 3 fund portfolio using low-cost mutual funds, index funds, and exchange traded funds .
3. Investing in Bonds
If you wanted to take a more conservative approach when investing with your kid, you could opt to invest in bonds.
Typically, this is not recommended for kids, since stock and equity tend to outperform bonds over the long run, and your child is likely investing for a longer period of time. However, if you have a low risk tolerance as an investor, it can be a good option.
Other Ways To Learn About The Market
There are plenty of ways to learn more about investing. With more knowledge, the better equipped you are to make smart investments and minimize potential losses. Any of the following resources are a solid place to start:
- Stock trading books. There are helpful books on investing that can start building your knowledge, including How to Make Money in Stocks by William J. ONeil and by Jack D. Schwager.
- Stock trading channels. If reading isnt your thing, try YouTube. Content creators upload video tutorials covering investment basics.
- Stock trading games. Stock market games help you hone your trading instincts with simulated markets and trading goals. Popular games include Wall Street Survivor, HowTheMarketWorks and the Young Money Stock Market Game.
- Demo account . Test-driving your investing skills with a demo account is arguably the closest you can get to real trading without risking a penny. This type of account lets you play with virtual money on a hypothetical market that mirrors live market pricing. Many online brokers give clients access to demo environments including Friedberg Direct, Forex.com and Questrade.
Well There Is A Way You Can Invest In Stocks While Under 18
With a custodial account, any parent, friend or relative can open a custodial brokerage account for a minor. The person that opens the account, known as the custodian, controls the account on your behalf. While the adult has ultimate control, you now have the opportunity to execute on that investing idea of yours and if things go well, you can take control of that account once you reach the age of majority in your state. For more on custodial accounts, check out this article here.
Make Your First Investment
Once the funds clear in your brokerage account, it’s time to make your first stock purchase. Decide which of the stocks on your list you want to buy and set up the order. We recommend using a to make the purchase.
When you’re ready, submit the order during market hours. Before you know it, you’ll be the proud owner of a small piece of what you believe is a great company, or, if you chose to go the passive route, a basket of great companies.
Now repeat the process and build out a diversified portfolio. Continue adding money to your brokerage account and buying more shares of the companies or index funds you want to own to take even greater advantage of compound interest over time.
How To Invest As A Teenager
Investing, essentially, is putting your money into something with the hope of a financial return, and its one of the best ways to build wealth and save for your biggest financial goals, from retirement to your dream home.
While most people start investing as adults, investing as a teen can give you a huge head start on saving for the future and learning vital money lessons.
Investing may sound complicated, but its easier than youd think to get started . In this article, parents and teens will learn the benefit of investing as a teenager, the best investments for this age group, and what accounts you can use to start investing.
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Learn The Basics Of Investing
As with any new adventure, investing might seem challenging at first. However, it’s relatively simple once you understand stock market basics and how to invest in stocks. Read as much as you can about investing so you know how it works, what mistakes to avoid, and the best practices to follow. Also, be sure to check out our book, The Motley Fool Investment Guide for Teens.
Investing And The Stock Market
Getting a grip on your finances early in life doesnt have to involve studying the financial times or stressing over the stock market. But even going to the bother of investing a few pounds a month at this early stage in life could give you valuable insight into the power of investing and the stock market.
And in this internet age, its easier than ever to find out the information you need to get started and to open a plan that is right for you.
Firstly it is important to distinguish the differences between saving and investing.
A savings account works much in the same way your average bank account works in that your money accrues interest. However, you may have noticed that interest rates are very low.
Or you may not have.
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Pros And Cons Of Investing As A Kid
When investing on behalf of your child, there are a lot of pros. As mentioned, its a great way for them to start accumulating wealth very early on thanks to compound growth.
It also teaches them valuable general personal finance skills, like how to invest money, buy and sell stocks, and what a retirement account is, among many other lessons.
However, it also comes with its cons. The biggest negative is that it could inhibit their ability to get financial aid when applying for college since a custodial account is viewed as an asset for the child.
What If Im Not Old Enough To Start Investing
Just because you have not reached the age of 18 yet does not mean you have to give up on investing altogether. In fact, there are ways in which you could get around this age restriction and begin your investment journey right now.
Lets discuss two methods in which you can begin your investment journey today, even if you are not legally old enough to open a brokerage account.
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How To Invest As A Teenager Or Minor
Investing as a teenager provides you with a significant financial advantage as you get older. Not only do you have more time for funds to accumulate, but you can benefit from compound interest and youth tax breaks.
Furthermore, investing as a teenager gives you valuable investing experience for later in life. However, figuring out how to start investing as a minor can be difficult. You will need an adult you trust to help you set up and manage accounts.
Lets take a look at how to invest as a teenager, the types of investments teenagers should consider and the best investments for teenagers.
Choose The Right Broker
No matter which type of brokerage account you decide to open for your kids, you’ll need to start by finding a broker. The best investment accounts for kids charge no account fees and have no minimum initial deposit. This gives your kids the chance to start investing with a small amount of money.
Look for an online broker with no account fees or investment minimum.
Consider, too, the costs associated with the investments your child plans to choose. For example, for kids who want to practice trading stocks, you should ensure the broker charges low or no trade commissions. If your kids just want their money to grow in a hands-off way, look for brokers with a large selection of low-cost index funds.
If youre looking for a brokerage account to teach your kids about investing, know that many brokers offer educational content, including online investing tutorials and even practice trading accounts.
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Why You Should Invest For Your Childs Future
If you are not yet convinced, let us take a step back
With the world we now live in, things are as unpredictable as ever. With some effects of COVID-19 yet to be felt and the ever-growing student debt showing no signs of slowing down, being financially secure is more necessary than ever. As a result, we must now save for two rainy days while anticipating the odd storm. Our children are our priority and we love them more than anything. We want them to succeed in all aspects of life and regardless of what they want to pursue in a career, having a financial peace of mind is essential.
Now, we all know that talking finances is not fun and teaching your kids about portfolio diversification or stock-splits is tough. Typically, the curious smile from a childs face drops when you respond with over-complicated financial jargon to their question about stocks. Thats where custodial accounts come in. If a child has an invested interest in what they are learning and can see that their $10 has grown to $15, for example, then you have their attention. They learn through doing and physically seeing how their money can grow, will allow the opportunity to educate. When your child turns 18 and has now several years of investing experience and knowledge built up, you have done a wonderful job as a parent building the foundation for financial success.
But why not just save? After all, it is a safer option, right?
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Stocks And Shares Isa
The JISAs big brother is the ISA. . And you can open an ISA from the age of 18.
Again this works in a very similar way to the Junior ISA being, effectively, a tax-free wrapper. One of the main differences is the annual investment limit is £20,000 whereas the JISA limit is £4,368.
Whatever way you decide to go, remember that time is on your side and starting with just a small amount could be a wise move.
Its also advisable to stay away from credit cards. No matter how appealing the introductory rate seems.
Try using this calculator to see the effect that investment growth can have on a long term investment plan such as a Junior ISA.
Can A Teen Invest In Stocks
Q: I am 16, and Id like to start investing in stocks. I dont have any income, but my parents are supportive. How can I open an account and start trading?
A: Its great to hear that youre interested in learning about investing at age 16. Because youre younger than the age of majority , youll need to open a custodial account, with an adult as the custodian.
The custodian will need to complete the paperwork and manage the account, but the money can only be used for your benefit the custodian cant withdraw money and give it to anyone else. Youll take total control of the account when you reach the age of majority.
Until then, you can work with the custodian to research stocks and choose investments. Most brokerage firms offer the same investing choices for custodial accounts as they do for their regular brokerage accounts, and the fees and commissions are generally the same too. For example, Schwab and Fidelity charge $4.95 for most stock trades and offer free trades for some exchange-traded funds.
Many firms have the same minimum investing requirement to open a custodial account as they do for a standard brokerage account its $2,500 at Fidelity, for example. But some give you a break. Charles Schwab lets you open a custodial account with just $100 . For more information about our favorite online brokerage firms and their fees and research tools, see Best of the Online Brokers at Kiplinger.com.
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Types Of Custodial Accounts You Can Open
There are a few different types of investment accounts that you can open as custodial accounts on behalf of your child.
Brokerage Accounts: Opening a custodial brokerage account is the most straightforward option. There are no contribution limits and few rules overall , just like a typical brokerage account. While there are no direct tax benefits with this type of account, you may face tax consequences if you gift over $15,000 through a custodial account of any kind.
Roth IRA:With a custodial Roth IRA, you have to abide by the contribution limits set for regular Roth IRAs that year, but its a good way to grow investments for a kid tax-free. A Roth IRA is typically the preferred custodial IRA for kids over a traditional IRA since kids can benefit more from the tax advantages of a Roth IRA.
529 Savings Plan:529 Savings plans are technically not a custodial account, but they are a way to save and invest on your childs behalf. In this case, the money saved in a 529 account must be used for educational expenses . With a custodial account, the funds can be used as the child sees fit once they are of legal age.
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Teach Kids Financial Literacy And Investing Skills
Investing for kids is a great learning opportunity for them, according to Henske.
Just like good exercise and nutrition habits, money habits are most successfully built at a younger age, he says. Getting a child interested in investing starts to build a foundation of inquisitiveness for them as well as building confidence in speaking about money. For many adults investing creates anxiety and has them put off putting their cash to work. This reduces its growth and compounding, which we know is hazardous to building a retirement nest egg.
To help prevent this from happening later in life, sit down with your child to discuss the investments you purchased for them. Youll want to talk about the importance of letting the money grow untouched, how to choose securities and how some simple changes and sacrifices, like forgoing a new video game and investing that money instead, can affect long-term results.
To help motivate them, Henske recommends painting investments in the context of a specific goal, like a vacation or a car.
Teaching a child early how much things cost helps them gain perspective, he says. Letting them figure out their time horizon until they will want to buy a car and matching that to their investment choices is a great conversation.
Long Term Investing As A Teenager
Most successful investment strategies tend to be long term in nature. Investing involves risk, and you dont want to be forced to sell when your investment is not doing well. For this reason, it is best to understand your investment time horizon before you begin risking your money.
An overall investment strategy including your expected time horizon, estimated risk, and expected return is an important first step before you invest.
Long-term investing also gives you the opportunity to earn significant returns over time. Most of the time, the longer you are invested, the more potential you have to make money. For example, a $10,000 investment in the S& P 500 in 2000 would be worth $31,200 in 2022, adjusted for inflation.
However, all investments involve risks and returns are never guaranteed, even if held long term. For example, a $10,000 investment in WTI Crude oil from 2000 to 2022 would be worth $6,296, a -37% return.
As a beginner investor, you should consider starting with a small investment. This way you can learn more about how investing works and get an understanding of the discipline. While you may make mistakes, this is a valuable learning experience.
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