The Basics for Teens
The teenage years may be full of angst over rocky relationships and pimples appearing at just the wrong time, but they’re also a great time for parents to begin talking about the finer points of investments with their teen. Here are a few tips to get you started.
Begin with the basics.
Before you get into margin calls, stocks splits, and P/E ratios, you need to help your teen understand some fundamentals. Start by sharing your investment philosophy. Explain that saving is for short-term goals and investing is a strategy that can help them meet long-term goals.
Next, move on to the concept of risk versus reward. Teens need to know that investments that offer higher returns often come with higher risks, and that investments with lower risks may very well deliver lower returns. This is a good time to explain the benefits of investing for the long haul, and how over time, stocks typically outperform other investments.
Diversification is another important concept for the aspiring teen investor. While stocks may be more attractive to teens, there may be a place in their portfolio for other investment options. Examples include bonds -- which are funds that an investor lends to a company as an interest-bearing loan -- and mutual funds that bring together money from many people and invest it in stocks, bonds or other assets.
Practice makes perfect
Like most things in life, when it comes to investing, it’s a good idea to experiment before actually putting money on the line. One of the best ways to do this is to have your child choose several stocks and follow their performance. This works particularly well when teens invest in companies that they are familiar with, such as a clothing, computer, or soft drink manufacturer.
Teach your teen how to track the company’s stock price. Watch for stories on companies your teen is familiar with and discuss how news impacts a stock’s performance.
There are also a number of stock investing games on the Internet that offer a fun and educational introduction to investing. You may also want to talk to someone at your child’s school about offering an investing simulation game allowing student teams to compete against other schools. Additionally, some high schools offer investment clubs.
Sooner or later – and probably sooner – your teen will want to move on to the real thing. Until your son or daughter reaches the age of majority, he or she won’t be able to own stocks or open a brokerage account. An alternative is a custodial account, which is set up and controlled by an adult for a minor. Just be aware that once the child reaches the age of majority, he or she has full rights to the assets in a custodial account.
Educate your teen about the difference between full service brokerage companies that offer a wider range of services and charge higher commissions for buying and selling, and discount brokers that leave investment decisions up to the investor and charge less to trade. He or she will also learn that companies have different minimums for opening accounts.
A lasting investment
CPAs agree that when you teach your teenager about investing, you’re making an investment of your own. Teens who get into the habit of investing at an early age are more likely to become financially responsible adults.
(Updated 2015) Reviewed and edited by Jason Freeman, CPA, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P.
Copyright, American Institute of Certified Public Accountants