CEE Standard: Financial Investing
Many students may not know about the different benefits of investing. Teach them the basics so they can live well, earn more, and be well informed.
Want to build wealth? In order to do so, you have to figure out how to make your money work for you. And what better way to do so than by investing?
Types of Investments
There are several ways to invest, so half of the battle will be determining which route you want to take. The basic and most popular types of investments for teenagers are money market accounts, stocks, bonds, and certificates of deposit.
- Money Market Account: an interest-bearing account that pays higher returns than traditional checking and savings accounts at a bank
- Stock: an investment that allows you to own a percentage of a corporation and pays dividends based on earnings
- Bond: a type of investment in which you loan money to a governmental establishment or corporation for a specified period of time in exchange for a return on your money
- Certificate of Deposit (CD): an investment that allows you to earn a fixed return on your money if your deposit remains intact for a specified period of time
As you progress and build wealth, you can also invest in mutual funds and more valuable assets, like real estate and commodities.
The Power of Compounding Interest
The earlier you start investing, the better, thanks to the power of compounding interest. To illustrate how it works, let’s assume you open a high-yield stock portfolio at the age of 16 with an initial deposit of $500. The average annual returns are 4 percent, and you plan to contribute $100 annually for 10 years. By the time you turn 26, your investment will be worth $1,989.
Asset Diversification
Have you ever heard the old adage, “Don’t put all your eggs in one basket”? It definitely applies to the world of investing.
If you choose to invest in stocks, don’t just pick your favorite company and go for it. A better option: Select a few companies, conduct research to gauge their past performance, and identify any key factors that indicate whether or not growth and higher profit margins are on the horizon.
You should also take a look at the company’s annual report to get a more comprehensive feel for what’s going on. And don’t forget to pay attention to the dividends paid out to shareholders.
When you diversify your assets, you’re protecting your investment by hedging against the risk of sustaining massive losses. Simply put: If one investment fails, you won’t necessarily be screwed across the board.
How to Get Started
Once you’ve done some research, it’s time to find a reputable financial advisor to answer your questions and help you get moving in the right direction. A few factors to consider:
- Does the advisor charge a flat fee or does he or she receive a commission based on the percentage of the amount you invest?
- What type of credentials does he or she have?
- Are the online reviews of this advisor mostly positive?
- Did you receive a referral from a family or friend?
Online platforms, such as E-Trade or Ameritrade, are also an option if you’re well-versed in investments and understand how the stock market works.
A Final Thought
There are no guarantees when investing, so it may be in your best interest to get your feet wet with a small amount of cash before diving into the deep sea. Otherwise, you could easily become disgruntled if the stock market takes a hit and your money vanishes right before your eyes.
Finally, always remember that investing to build wealth isn’t always a sprint — it’s a marathon that could yield you great returns if you wait it out and let the power of compound interest work in your favor.
- What does it mean to make your money work for you?
- Why might CDs be better investments than stocks?
- Why might an investor look at the annual report of a company when buying stock?
- What are the risks and rewards of investing in the stock market?
- Do you understand enough about the stock market to feel confident to invest?
