Remember your children filling up their piggy banks or mason jars with the change they received from relatives or you on festive days? How eagerly they saved to buy their favorite toy or book they wanted?
You encouraged your children to save when they were toddlers and young adults. So, why not share investing ideas with your teenagers so they make the most of their savings?
Children’s Day is around the corner, so teaching your children, especially teenagers, the benefits of investing would be their best gift.
Why teach them about investing when you are working to ensure their future is safe and secure? We are sure as parents; you may want to do everything for your child’s future. However, the future is uncertain, and helping your teen with investment ideas now so they can avoid financial troubles later seems prudent.
Why Must You Help Your Teenager with Investment Ideas Now?
Experts often state to start investing early. However, it is never too early if your children understand more about money. Moreover, if your teens start investing now instead of waiting to invest later in life, they may have an advantage over their peers both; in the returns they earn and the knowledge they gain from investing.
Benefits of Compounding: Age is one of the most valuable factors in investing. You can enjoy the benefits of compounding, where your money grows multi-fold. The earlier the teenagers start investing, the longer their money will work for them.
For instance, imagine your teen Alisa starts investing Rs. 1000 at age 15 every month with a 10% return till age 60. Then, teen Alisa will build a corpus of ~95 lakhs for an investment of Rs. 528000.
But if she starts investing Rs. 1000 at age 30, she will build a corpus of ~22 lakh for an investment of Rs. 348000.
Remember, the money earned from investing ideas now can help your teen pay for college, start a business, or travel globally later.
Financial security: Investing early will help teens become financially secure and understand investing better. Personal finance can be stressful. A 2018 National Financial Capability Study from Financial Industry Regulatory Authority found that 53% of Americans believe their finances make them anxious. Among the respondents, those aged 18 -34 felt stressed the most.
If you help your children learn about finances from a young age, you can help them be less anxious and more confident about money. Now that you know why you must encourage teenager investing. As your children enter their teens, they may want to manage their finances. As a parent, the best thing you can do is help your teen understand investing, share a few investing ideas, and explain the pros and cons, the dos and don’ts, and the ways to start investing.
Four steps to teenager investing
Set up goals and explain the reason for teenager investing
Before sharing investment ideas with your teenager, please encourage them to set up financial goals. These goals can be anything, from buying a phone or a sporty bike to purchasing a house or going abroad.
Help your teen children understand the time they must invest to achieve their goals. They must invest for at least a year or more for minor purposes but stay invested longer for larger goals. Once your children fix their goals and know why they must invest, they can choose the right investment ideas and the amount to invest.
The goal value may depend on the sum your teen can invest as a lump sum or regularly. Some parents may want their teens to experience investing without specific goals. However, the best thing you can do is help set a goal to create wealth, as your teen could follow the same method to create wealth as an adult.
Study the investment ideas, return, and risk options
Just outlining goals, timelines, and values is not enough. Help your teen now pick suitable investment ideas and opportunities. You must explain the workings of investment ideas like FDs, RDs, PPFs, mutual funds, equity stocks, and real estate works. The kind of returns possible and the risks involved.
List the advantages and disadvantages of investment ideas, letting your teen pick his investment option. For instance, if the goal value is low and within a short time frame, your child can select a recurring deposit. However, investing in equity mutual funds would be suitable if the goal is a college education.
What if your child wants to explore equity investments? Then, explain the diligence your teen would need to research a company before investing and the added follow-up required to keep an eye on the investments made.
Do the paperwork and start teenager investing
After your teens choose the investment option, help them set up their savings and Demat accounts. Set up a custodial account if your teen is less than 18. However, if your children are almost 18, they can complete the forms under your supervision.
Your children can deposit their monthly allowance in the bank account, monitor how their money is growing, and check if they are on the way to achieving their goals. Help your children set up e-mandates if they are using their accounts to invest. Remember to explain the importance of having money in their savings account on the due date.
Caution your teen about risky assets. Start small
For hands-on teenagers who take to investing quickly, the lure of easy money in stocks or crypto can be tempting. Avoiding speculation at this stage is the best thing to do. However, despite explaining the concept and its risks, if your child insists, let him start with a small amount. It must be an amount that you are ready to write off. Then, let your children invest for a long time to understand how losing money or earning a little feels.
Data shows more teenagers in India are looking for ways to experience the world of investing. However, per SEBI, a minor can have a savings and Demat account but cannot buy and sell stocks using a trading account. However, as a guardian, you can buy and sell stocks and mutual funds for your teen. So, before considering a few investment ideas for your teens, let’s see why investing as early as possible is imperative.
Benefits Of Teenager Investing
- Enjoy the benefits of compounding
- You become financially disciplined
- You improve your risk appetite
- You create wealth for yourself
- You save on taxes
How much would a Teen need to start investing?
You don’t need a crore or lakhs to start investing. All you need is Rs. 500 to 1000 to start teenager investing. Then, your teens can add to it later when they earn and save a little more.
Let’s see some investment ideas for your teen
Stocks: Your teen can own a piece of a publicly-traded corporation through stocks or IPOs. An IPO lets investors earn good returns when the company lists on the stock market. Investing in stocks means your teen becomes the shareholder and part-owner of the company. Investors make money when the value of the stock increases, and through dividends, companies pay shareholders.
Of course, you would need to operate the Demat account on your teens’ behalf. Consider teenager investing in one or two companies you know. Your teen must practice buying and selling before. So, set up a virtual trading account to help your teen understand how investing works before using actual money to invest.
Mutual Funds: If you want your teen to understand how to become financially disciplined, invest in a mutual fund. A mutual fund brings together money from different investors to invest in a diversified portfolio of stocks, bonds, or other assets.
The collective holdings the fund owns are known as its portfolio. You can start teenager investing with as little as Rs. 500 a month. A mutual fund will let your teen understand what to expect during a bull or bear run. As the mutual fund value increases, your investment value does too.
Exchange Traded Funds: An ETF is like a mutual fund; however, you can add several stocks to your child’s portfolio via a single investment. But unlike a mutual fund, an ETF trades throughout the day like a stock. Help your teens invest in an index fund to understand how investing works. An index fund is an index-based ETF that mimics an index like the NSE, BSE, or other stock exchanges. An index fund is also the easiest way to diversify your portfolio.
Government Bonds: A Government Bond is another instrument your teen can invest in to earn fixed interest on a lump sum amount. The principal is repaid after the bond matures. The government issues these bonds when they want to finance the operations of its initiatives.
Bank Fixed Deposit: Another fixed-income asset popular in India is the Fixed Deposit. India has one of the highest deposit rates in the world. Your teen can invest in a fixed deposit for a specific goal. After the deposit matures, your teens can use the principal plus compound interest to fulfill their desires. A bank fixed deposit is the simplest way to start teenager investing.
Post Office Fixed Deposit: Like the banks’ fixed deposits, you can help your teenager invest in a deposit scheme the Indian Postal Services offer. Such fixed deposits can help your teen earn guaranteed returns on the lump sum deposited with the post for a set period.
While teaching your teens about investment ideas is excellent, making them aware Of Financial Risks is crucial. There is more to investing than just starting early, diversifying, and investing goals. We mean financial risks. These risks will play a role in your teens’ decisions about the money.
Knowing these risks’ impact and ways to overcome them will help your children become better investors of tomorrow. So before we look at the risks associated with teenager investing, let us understand more about financial risks.
What is Financial Risk?
Nothing is certain or guaranteed when it is money. The uncertainty or possibility of a loss is a financial risk. Such risks are not just factors while investing but also in other areas like borrowing. The most common risks associated with investing are due to business, volatility, inflation, liquidity, interest rates, and credit risks.
Can investors overcome these financial risks? Yes, only if they diversify their portfolios, minimize volatility, and avoid making emotional decisions.
Financial Risks and Investment Ideas
Financial risk is a term investor uses while investing. That’s because you (the investor) put in money to buy assets that could grow in value over the years. Every time you invest, you accept the risk of losing the money you’ve put in.
Understanding that the risks don’t stop after your asset has grown in value is essential. Risks will always be a part of any investing journey. That is what your teens must understand before they start teenager investing.
Types of Risks in Investing
Volatility is the frequency of price changes in a particular stock price. For instance, a company’s stock could move up or down for many reasons. Volatility is unpredictable and can happen at any time for varied reasons. One of the reasons could be the company news or quarterly results. The economic environment in the country and the world can also make the markets volatile.
Business risk means the risk of investing in a specific company. You may have thoroughly researched before investing; however, things in the business can change over the years. Your stock price depends on how the company performs during the year.
If the company underachieves or goes shuts down, then you (the investor) may suffer financial losses. But, if the company does well, the stock prices will rise.
Inflation is always a factor as the prices of goods and services can rise due to increased demand, hikes in input costs, supply issues, and more. High inflation tends to decrease the purchasing power of your money.
For instance, if you have Rs. 100, the inflation rate is 7%. Your one hundred would be worth only ninety-three the next year. (100-7 =93)
Inflation comes into play when the returns on your investments need to be higher to beat the inflation rate. Conversely, you lose money when the rate of return on your investments is lower than the inflation rate. It is true when you invest in low-risk assets like fixed deposits (FDs), where the interest rate offered is often lower than the inflation rate.
Liquidity is how easy or difficult it would be to buy or sell your asset. Often liquidity is an issue when it means selling a house, land, or any other immovable asset. The more liquid your assets are, the easier you can sell and buy them. This rule holds when it is equity shares.
The lender always faces credit risk, i.e., the risk that the borrower may not be able to repay the borrowed sum. However, credit risk comes into play if you invest in bonds. It is when the bond issuer (borrower) won’t pay back the bond once it matures. For instance, the credit card lender takes on the credit risk when someone spends money using a credit card but may not be able to repay it.
Interest Rate Risk:
You (as an investor) always face the risk of rising interest rates. It is true when you invest in bonds or FDs. For instance, the interest rates go up, but you have invested in a bond already. Therefore, you will lose out on the increase as you took a bond before the rise in interest. Similarly, selling a bond in the secondary market becomes problematic when the interest rates go up, as other investors can invest in bonds with higher interest rates.
Financial Risks and Borrowing:
We are sure you have taken a loan, whether it is for a home, finer things, or pursuing higher education. But, do you remember the lender, i.e., the bank always considers their risk before lending money?
The risks come into play when you cannot pay back the loan. The next step will be incurring interest, penalties, and added fees if you default on EMI payments. For instance, if you took a loan with your home as collateral, you risk losing the house when you can’t pay the loan. Help your teens understand that the consequence of non-payment are the risks when they borrow money for any purpose.
How can teens minimize financial risk?
While you help your teenagers understand financial risks, you can also teach them to reduce their risks. Here are a few ways to do it.
Build a Robust Financial Foundation
Experts recommend putting down the basics of a sound financial foundation. The basics must include budgeting, saving, and understanding goals before investing. A robust financial foundation will help you build a fortune and not take unnecessary investment loans to meet your goals. In addition, having a fallback strategy can mean the difference between suffering losses and creating wealth.
Diversify Your Portfolio
Diversification should be a key mantra your teens follow. It is one of the best things you can recommend, reducing investment risks. Your asset allocation is how you spread your investments in different assets. The more varied your asset allocation is, the lower the risk. If one investment falls, the rise or stability in the value of other assets can compensate for the losses.
Don’t Try to Beat the Stock Market
Investing to create wealth is not about beating the market. With so much information available young investors learn about advanced investing strategies that could be too risky. Young investors may choose to beat the market, which can backfire. Your teens can still play with their portfolios and try innovative investment ideas and strategies, but they must be ready to face potential losses.
Don’t make Decisions based on Emotions
Have you heard people say emotional decisions are most often wrong? Not talking about emotions when discussing financial risks is a mistake. What happens when something goes wrong with your child’s investments? They may have an emotional reaction to it. Discussing how emotions play a role in investing may help them avoid expensive mistakes.
We are sure you’ve seen new investors react when the market falls. They tend to panic-sell, fearing losses, or start buying when the demand is high as they fear missing higher returns. Teach your teens to balance avoiding excessive risk and taking enough risk to achieve their target returns.
Remember to explain that risk tolerance changes with age. Financial risk is unavoidable. While talking about money, remember to speak of financial risks, the role it plays in their finances, and how your teens can minimize them.
Seven Steps for Teenagers to Start Investing Today
We’ve discussed the financial risks you must be aware of so you can avoid them when investing. Next, let’s see your teens’ steps to begin investing.
Like Rome was not made in a day, successful investors aren’t made in one Day either. Understanding how the market ticks, what works, and what doesn’t is vital. Finding your investor personality will take time and patience.
Let’s see what you can do to get started.
Set up Goals:
The first step to investing as a teen is setting up goals, i.e., financial goals. These goals can be either short-term or long-term goals. Knowing your financial goals will help you pick the right investment ideas and the amount you must invest to achieve your goals. In addition, saving a little for the future will teach you about delayed gratification, something successful investors understand.
Research the Assets, Their Return Potential, and Risks:
Once you have picked the goals, the period, and the value needed, it is time to opt for the best investment ideas. First, understand each asset -fixed deposit, recurring deposit, PPF, mutual funds, and stock work. Next, find each asset’s return potential and the associated risks.
For instance, if the goal is small and the period is short, you can start with a recurring or fixed deposit. But if the goal term is longer, you can invest in equity mutual funds or explore investing in stocks.
Research the Companies You Know:
The ‘buy what you know is a maxim most investors follow. The idea is to invest in companies that you understand. You can start by listing companies you use the products of or know.
Once you have the list handy, you can search online to get more information about the company, its growth prospects, the fundamentals of the company, and how well it has been doing over the years. Finally, understand stock prices, and compare its price today with their prices a few years ago.
Find out more about dividends and how you can reinvest the dividend to continue saving and building your assets. Knowing the company and what drives it could make you a long-term investor.
Set up Their Savings and Demat Accounts:
Investing is possible only when you have savings and a Demat account. If you are 17 or 18 years old, get your parents to help you fill-up the forms and submit them.
Deposit your allowance in your account and monitor it to know if they are on track to help you achieve your goals. Set up an e-mandate if you invest in an asset using money from your account. If you are a minor, your account will be a minor account, and your parents will be the guardians.
Invest In Index Funds
You may love instant gratification, and investing for the long term may not be interesting enough to focus on. So, consider Index funds to ensure you have more control over your investments.
If you invest in a single company, you may experience every high and low the company faces. However, if you invest in index funds, you may get exposed to your favorite companies. Doing so will help you have a better attitude toward investing, understand how diversification works, and make money.
Know How To Avoid Teenage Investing Speculation
As teens, the lure of easy money in stocks and crypto-currency may be hard to resist. But avoid speculation initially. Know why it could be a bad idea to speculate when you have just begun investing and need help understanding the stock market.
Invest a small sum in a virtual stock market app and monitor your investments. If the speculation doesn’t work, you will understand the consequences without suffering a substantial monetary loss. But if you feel you must experience it for real, invest a small sum you can afford to lose and write it off for the long term. That way, you will understand the pain of losses and the happiness of earning good returns.
Be Eager To Learn
The market is challenging to forecast, but volatility will always be a part of it. As a result, learning to become a successful investor is an ongoing process where the investment journey is often long and full of challenges that can affect you mentally and financially.
There will be times when the market may behave differently despite all the precautions your take. Therefore, it is better to acknowledge your mistakes and learn from them. You will find plenty of information available on the Internet for investment ideas and teenager investing. Make reading books on investing a part of your routine.
This Children’s Day, gift your teenager the knowledge and investment ideas to become financially free so they can use their talents to pursue things that make them happy.