Stock Market Investing For Teens
Maybe you’ve seen your parents talk about or practice it. Maybe you want to get rich quick. Maybe your friend is a finance nerd. Maybe your money’s burning a hole in your pocket. Whichever reason, you’re ready to hear what this whole “stock market” thing is about. Let that hole in your pocket become a figurative doorway… welcome to the world of stock market investing!
General Reasons to Invest
Investing’s a useful facet of adult life you might have to learn someday. For example, when an adult enters a company, they start saving for their retirement. Many companies offer 401(k) plans that allow you to invest your savings into the stock market to grow those savings. However, only 54% of Americans are invested in the stock market. The adults in your life might be part of those 54%. Or they might not. Investing’s a choice that just a little more than half of people take. So why should you?
First of all, you may not realize that starting now as a teenager could be a huge advantage. If you decide to invest sooner, you’d get a head start. If you’re successful, your money increases over time. The longer it’s invested for, the more profit you earn. Also, as a teenage you have limited expenses. You’re not providing for a family (hopefully), and you have time to focus on your investments in a way very few adults get to do. Most just hire somebody to do it for them. Well, those people sometimes (often) bungle it. Also, it’s not like you can afford a private advisor anyway. Because why would you be reading this?
Also, there’s the small problem of inflation – growing into a big problem as time goes on. You may have heard of it – it’s when money loses its purchasing power. A bus ride cost nothing but a nickel back in the 20th century. Now public transit costs over 50 times more – and forget about clothes, food, other essentials. The US is at 2% inflation per year, so hoarding money in a shoebox in your closet doesn’t keep its value the same. It’s decreasing. After 50 years, the $100 in your shoebox will only have purchasing power equivalent to $36. Saving it in a bank won’t cut it either. Banks are only borrowing at 1.7% interest now (at most), so you’re losing 0.3% every year. That doesn’t sound like much, but 50 years later that $100 will turn to $86. Sure, you can work extra to earn that amount back, but why do that when you can invest? If we care about our finances, we need to make sure our money is growing faster than the inflation rate.
But you know investing is risky. You can lose money. You need to be prepared to take that risk. The age-old adage is true: no pain, no gain. And what is life without risk? We explore the unknown, risking getting lost. We learn, risking our innocence. We love, risking heartbreak. Let this be a challenge unto you, to see if you are mentally disciplined enough to enter into this strange new field.
Just the Basics, For Now
So. What is this “investing” business we speak of? To clarify, we’re going to be talking about investing in stocks only. There’s other things you can invest in (bonds, ETFs, mutual funds, hedge funds, a car, relationships, your education) but I won’t be covering those today.
Backtrack to my absolute, positively favorite class of all time. APUSH. Remember joint-stock companies, vaguely? Has the vocab word been mercilessly pounded into your memory? Back in the day (way back in the 18th century) people discovered they could get immensely rich off of sending ships to trade with other countries, and making colonies. Shipping vessels were expensive – a large initial amount at the outset – but people would reap rich rewards. To fundraise, corporations like the Dutch East India Company, the British South Sea Company, and the Virginia Company, the one that financed the Jamestown colony in America, sold off pieces of themselves to investors – called shares. When you owned a share of a company, you shared in whatever profit the company makes from trades and colonies, but you also shared in their risk, meaning you would lose money if their business failed. By owning their shares, you were partly owning the company.
They were called joint-stock companies because a stock, see, is the right you have to a share of the company (calling them joint-share companies wouldn’t make sense – “joint-‘pieces’” companies is questionable compared to “joint-‘ownership rights’” companies.) People now use the words “shares” and “stocks” interchangeably, but there’s a subtle difference. A stock market, then, is just the arena where you trade stocks. That sounds really vague – because it is. It’s like the general automobile market, or supermarket. A more specific word to use would be stock exchange, because that’s the actual place where stocks are traded – the New York Stock Exchange (NYSE), or the NASDAQ, or the Stock Exchange of Thailand (SET).
Stock exchanges make money, essentially, by trading information. A company pays the stock exchange to be listed in it, called a listing fee. This means that if you want to make shares of your lemonade stand available to investors, you need to pay the fee – sometimes tens of thousands of dollars – and jump through bureaucratic hoops. Whenever someone buys your stock, especially a large amount of shares (100 or more, usually), a tiny bit of the money goes to the stock exchange too.
Don’t Buy Into Short-Term Price Changes on the Stock Exchange
Stock exchanges display price and other company information to investors, encouraging them to buy or sell. Their goal is to make investors trade as much as possible, but that isn’t what you should always do if you want to make the most wealth for yourself. The financial writer Jason Zweig tells us, “Wall Street sells stocks and bonds, but what it really peddles is hope.” When people think the price of a stock will go up, they buy more of it. When they think it’s going to go down, they sell. Everyone tries to buy stocks at a low price, then sell at a high price, making more money – but all of their financial decisions come from their hopes for their future. The price of a stock drops when many people think it’s going to drop, and they sell. When people think a certain stock price will go up, everyone buys into it, making it go up. Balancing the people who are selling with the people who are buying makes the price of the stock wobble every day. That’s kind of scary when you think about it. No one can know the future, so these people are actually speculating. There’s a funny cartoon that illustrates what careless investors do with the stock market:
Sadly, this isn’t much of an exaggeration. Looking at this crazy cartoon, you might ask, “But you said that stocks are just rights to own shares, and shares are parts of a company. Why do shares of a company become more valuable just because many people think it will?” Ah, you are right. A company’s stock price, as you know, will fluctuate wildly over the course of a day, but the company itself stays much the same, only growing or improving in the course of months or years. One of the most important things to know as a smart investor is there is a huge difference between the price of a stock and its value. Journalists mix it up all the time: “The value of this stock grew 50% today!” But its real value didn’t grow, it was the price that grew. The famous investor Warren Buffett said, “Price is what you pay. Value is what you get.”
You should not pay too much attention to a stock’s changes in price. Instead, get to know the company behind the stock better. Most investors know nothing about the company they’re investing in, besides their ticker symbol – the letters that symbolize the company on the stock exchange, like APPL for Apple, WMT for Walmart. Still, it’s hard to determine the real value of a stock, just like it’s hard to determine the real value of your house. It’s more like a range – between $300,000 and $600,000 maybe? And solid-looking companies may fail as well, without any warning signs. No one knows the future, so it’s risky. Your job as an investor is to minimize risk, and that means being cautious.
The stock market is a challenge, and your opponent is yourself. You will need to manage your mentality and own up to your decisions. The worst thing to be is overconfident, or thinking you have the best investing strategy. On Wall Street, there is nothing someone hasn’t tried before. Jason Zweig says in his book, “Those who ‘play’ the stock market as if it were a game will lose. Those who respect it as a force of nature will prosper, but only so long as they are humble and patient.” Humility. Patience. Those, and other good qualities, should be present in every smart investor. The ancient proverb says, “Be not wise in thine own eyes.” Not even the most experienced investor, one who manages the most money, knows the future. But take heart! If you protect yourself from irrational thinking and bad risk (because there is good risk and bad risk), and fortune is on your side, you will prosper.