Guide to Investing in the Stock Market for Teenagers

Jul 3, 2024

Guide to Investing in the Stock Market for Teenagers

Introduction

  • Free step-by-step course on how to start investing in stocks.
  • Covers how to invest if under 18 and some recommended investments.

Lecture Overview

  1. Introduction to stocks
  2. Important things to know before investing
  3. How to get started investing in stocks
  4. Custodial accounts
  5. Examples of stocks to buy
  6. Final thoughts on investing while young

Introduction to Stocks

  • Definition: Stocks represent ownership in a fraction of a company.
  • Example: Owning 100 shares out of 1,000 means 10% ownership.
  • Purpose: Companies sell stocks to raise money for business operations.
  • Public vs. Private: Public companies have stocks that trade on the stock market.
  • Ways to Make Money: Through dividend income and capital appreciation.

Dividends

  • Definition: Money paid to stockholders for holding the stock.
  • Frequency: Paid out monthly, quarterly, semi-annually, or annually.
  • Calculation: Dividend yield = dividend payment / stock price.
    • E.g., a $20 stock with a $1 dividend has a 5% yield.
  • Purpose for Companies: Reward shareholders; part of corporate profits.
  • Example: Johnson & Johnson has a 2.74% dividend yield.

Capital Appreciation

  • Definition: Rise in the stock's price.
  • How It Works: Difference between purchase price and selling price is capital gain.
    • E.g., buying at $10 and selling at $12 yields $2 in capital appreciation.
  • Price Fluctuations: Driven by supply and demand; good news increases demand.

Compound Interest

  • Definition: Interest on the initial investment plus the interest already earned.
  • Visualization: Shows exponential growth over time.
  • Importance: Critical for long-term investment growth.
  • Example: Investing $100 with a 5% return grows significantly over time.

Finding Your Investing Strategy

  • Types of Strategies:
    • Growth/Value investing: Active, short-term trading.
    • Dividend/Passive investing: Long-term, buy-and-hold.
  • Recommendation: Passive investing is often better for beginners.
  • Key Points: Invest in safe stocks consistently for compound growth.

Timing the Market

  • What Matters: Consistent investing in safe stocks.
  • What Doesn't: Trying to time the market perfectly; day trading.

Custodial Accounts

  • Definition: Accounts adults manage for minors to invest.
  • Requirements: Minors need parents to open a custodial account.
  • Types: UGMA (financial assets) and UTMA (financial and physical assets).

Pros and Cons of Custodial Accounts

  • Pros:
    • 24/7 customer support
    • Flexibility and simplicity
    • Lower taxes for minors
    • Can build compound interest
  • Cons:
    • May reduce financial aid eligibility
    • Irreversible deposits
    • Beneficiary cannot be changed

Power of Compound Interest (Revisited)

  • Investing a year earlier can significantly increase long-term returns.

Active vs. Passive Investing

Active Investing

  • Requires extensive research (e.g., financial ratios, statements).
  • Time-intensive; not recommended for beginners.

Passive Investing

  • Invest in safe, long-term funds (mutual funds, index funds, ETFs).
  • Use dollar-cost averaging: consistent investments over time.
  • Recommended ETFs: Apple, Amazon, VTI, VO, SPY.

How to Get Started

  • Under 18: Requires a custodial account through platforms like Charles Schwab, Vanguard, TD Ameritrade, or M1 Finance.
  • 18 or Older: Open your own brokerage account (e.g., Weeble, MooMoo).

Required Information for Custodial Accounts

  • Social security number
  • Driver's license number
  • Employer details
  • Minor’s details
  • Transfer information

Encouragement for Parents

  • Educate children on investing basics.
  • Open custodial accounts early.

Alternative Investments

  • Options: Education, skills, coaching, mentorship, starting a business.
  • Benefits: Higher ROI compared to traditional investments.

Recommended Brokerages

  • TD Ameritrade: Strong reputation, 24/7 support, no fees, diverse options.
  • Vanguard: Low-cost ETFs, index funds, no commissions.
  • M1 Finance: Smart transfers, high-interest checking, crypto options.

Final Thoughts

  • Taxes: Children’s earnings are taxed based on specific rules.
  • Consistency: Set up automatic investments to benefit from compound interest.
  • Safe Investments: Focus on ETFs like VO, SPY.
  • Continuous Learning: Educate on stock analysis and metrics for future investing.
  • Invest in Yourself: Focus on self-education and starting businesses for higher ROI.

Resources: Links to further courses and brokerage platforms available in the video description.

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