Want to get the young investor in your life on the right track? Take a look at these tips.
Most people put off investing in stocks because it seems intimidating and expensive. Because of this, many never end up doing it.
The earlier you start, the more likely you are to build some serious understanding and wealth. Here are five easy tips to help children and young adults get started in the stock market.
Make Your Money Work for You
The secret to building large amounts of wealth is to invest your money, which means getting your money to work for you. Let’s say your child saves $1,000 and stores it in a shoebox. If they come back a year later, or 100 years later, they’d obviously still have $1,000 in that shoebox.
Now let’s say they invest that $1,000 in the stock market. Stocks can go up and down in value, but overall, on average, they go up. For example, they went up 9.8 percent a year on average from 1928 to 2014. If you invested $1,000 in 1928, you would have had more than $3.4 million now!
Start With the Right Kind of Brokerage Account
Brokerages often require thousands of dollars just to open an account. Many stocks are hard to afford, especially for children who are saving small amounts of pocket money or birthday and holiday gift money.
For example, a share of Disney costs about $100, while a share of Amazon costs more than $900. Look for a brokerage that requires no account minimum and allows the investor to buy and sell stock in fractional amounts.
At Stockpile if your child wanted to buy $50 of Disney stock, that would not be a problem—that $50 translates into half of a share. This ensures young people can invest as much or as little as they want or can afford.
Another thing to avoid is big monthly fees or trading commissions because it will eat into your child’s investment return.
Finally, your young investor will most likely want to keep track of their investments; after all, seeing how much money he or she are making is a big part of the fun. A key benefit of using a brokerage like Stockpile is that it allows children to login to their account to view their purchased stocks, but then requires parental approval to purchase additional stock.
It’s like being a student driver—your child gets to be in the driver’s seat, with an adult as his or her copilot.
Start Early, Invest Regularly, and Diversify
Remember how we said the stock market went up an average of 9.8 percent a year between 1928 and 2014? The thing is, it’s difficult to predict which stocks are going to go up, or when.
Since it’s virtually impossible to know which years will be the good ones, starting early will (on average) be better than starting late so that investments have more time to grow. If cash is invested regularly, the risk will be spread over multiple years, so money is not over-invested in a bad year.
If the investor diversifies his or her portfolio, the risk will be spread over multiple stocks instead of putting all eggs in one basket.
Teach Investors about Strategy
One good strategy is to buy and hold a stock because there is a belief in the company that its stock will go up over the course of months or years even though it might be bouncing around a lot day-to-day.
Buying and holding a little stock every month is called “dollar cost averaging.”
Another strategy is to buy on the dips, where the investor pounces on a stock they’ve had an eye on when its price dips. Alternatively, teach children to buy stocks that are considered underrated or undervalued and hold onto them until they make a comeback.
No one of these strategies is foolproof, of course.
For example, an investor could buy on a dip and watch the stock dip down even further. But having a strategy, sticking to companies well-known to the investor, and staying informed about them will usually provide a leg up.
Enlist Friends and Family to Help
Help build your child’s stock portfolio faster by asking friends and family to invest for your child’s future. Look at the markets and company stock values with your child and share a wishlist of your child’s favorite stocks with friends and family.