Investing is a great way to let your money work for you while you are busy doing other things; this is called passive income. Investor Warren Buffet defines investing as “the process of laying out money now to receive more money in the future.” You can invest in bonds, mutual funds, exchange-traded funds, real estate, commodities, etc.; however, this article will explore how a teenager, or a beginner, should get started investing in stocks and why it is beneficial for their future.
Well, what exactly is a stock anyways?
A stock is a share of ownership in a company. Some people buy and sell stocks quickly over the course of a couple of hours, days, weeks, or months—people who do this are called day traders. However, given the context of this article, I believe teenagers or anyone who is less experienced with investing in stocks and are looking for less risk should buy stocks and hold them for many years—these people are called investors.
Where can I buy a stock?
Stocks are usually bought and sold on stock exchanges, which is a place where buyers and sellers exchange their shares for money or their money for shares. As an individual, you cannot trade directly on a stock exchange; you will need a brokerage account, which acts as the “middleman” that gives people access to a stock exchange. In the United States, well-known brokers include TD Ameritrade, Charles Schwab, Fidelity, E*Trade, Robinhood, and Webull. All of these reputable brokerages have an amazing user interface and make it really easy for beginners to start investing. If you are under 18, a parent or guardian has to open a custodial account and deposit the funds. Once these funds are transferred, you can begin investing the money with your parents executing the trades.
How can I place an order for a stock?
The two major types of orders that every investor should know are the market order and the limit order. A market order is the most basic type of trade, where you can buy or sell immediately at the current price or anywhere near what the stock is trading at. In fast-moving and volatile markets and illiquid stocks (which I recommend as a beginner to stay away from), the price at which you actually execute the trade can deviate from the last traded price; basically, market orders don’t guarantee a price, but they do guarantee the order’s execution. A limit order allows investors to buy and sell securities at a certain price in the future, so this type of order executes a trade if the price reaches the price you specify. There are some more advanced types of stock orders (stop-loss order, stop-limit order, AON, IOC, FOK, GTC, day, and take profit); however, I recommend as a beginner to stick to market or limit orders.
What should I look for in a stock & what type of stock should I invest in?
Many investors choose to buy an index, which is a collection of stocks, rather than a single stock. For example, the S&P 500 is an index of the 500 U.S. stocks with the largest market capitalizations. If you wanted to invest in an index like the S&P 500 (which I highly recommend), you would need to buy to the exchange-traded fund (ETF), which represents a certain index. The ETF for the S&P 500 trades under the ticker SPY. Indexing consists of buying the ETF of the index and holding it for the long-term; this is called passive investing, where an investor can gradually make money over time (I highly recommend this method to beginners who want an extremely slow, but safe, way to make money and who don’t have the time to research specific companies). Buffet explains investing perfectly: "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." This statement may seem vague and ambiguous to many, but, basically, if you are a person, especially a young teenager with many years ahead of him or her, who is looking to steadily increase his or her portfolio, then invest in an index fund, mutual fund, or a specific company that you believe will outperform the market over the course of many years. In addition to ETF’s, I recommend looking into a dividend stock, which basically makes a cash payment into your account every 3 months (or however long the company specifies).
Investing in dividend stocks is one of the best ways to build wealth because you can take the cash from a dividend payment and use it to buy more dividend stocks. One of Warren Buffet’s investing strategies is to buy a wonderful company at a reasonable price and hold it for the next 50 years. These stocks can be value stocks or growth stocks. Value investing is about buying something for less than it is worth, and a growth stock is a stock of any company that is expected to rapidly grow its revenues or earnings (more on value and growth investing and P/E ratios in a future article). All in all, I recommend investing in an ETF, mutual fund, or an individual company that is projected to grow over the many years to come and then reinvesting your dividends into more long-term investments to grow your portfolio more.
I hope this article set you in the right direction to at least start looking into investing in stocks or studying and evaluating companies. The goal of this article is to show you how investing at a young age is truly beneficial in the future; investing doesn’t have to be hard, daunting, scary, or nerve-wracking. Invest in companies that you truly like and enjoy and believe are making an impact in today’s world. Don’t invest in something you heard in the news or from one of your buddies. Do actual research on a company you see growing at an exponential rate over the years to come with a price that is below the value of the company. So, I recommend setting up a custodial account with your parents (if you are under 18) or just setting up a brokerage account with a brokerage firm you find enticing and then investing in an ETF or company that you feel is safe enough for you to invest in and that will return a high yield.