By Jacob Frenzen
Investing is one of the best ways to build long-term wealth and time is the secret to great results. Learning how to invest as a teenager gives you lots of time for your money to grow and is bound to help you achieve financial independence. But what exactly is investing? What are the different kinds of investments? Where do you start? All these questions will be answered in this post. Ready to get started? Let’s jump in!
What is Investing?
Investing is, put simply, taking money and making more money with it. Forbes defines investing like this:
Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains.E. Napoletano, Forbes
That’s just a fancy way of saying buying stuff that will make you money. “Stuff that makes you money” is called assets.
Now, the word ‘assets’ might conjure up images of business people in suits strutting around: “we need to review our assets…” “How’s the asset to liability ratio looking?” But in actuality, assets are everywhere and are super common. In fact, you probably have an example of an asset right in your school: a vending machine.
Let’s say you buy a vending machine for $500. You do your research about the best locations and decide to put it in a mall. Then, every month, you buy some food and drinks to stock the vending machine. People visit the vending machine and they buy your food and drinks at a higher cost than what you paid for them. Every month onward, the vending machine makes you an average of $20. That’s an asset!
The vending machine is an asset because it’s something that makes you money without you having to do anything. What’s more, eventually it will pay its own price off, still generate monthly money for you, AND you can sell it for the price that you bought it. Your initial $500 yielded you so much more down the line. That is using money to make money, and that is the essence of investing.
Why Should You Invest as a Teenager?
You might be thinking “That’s cool and all, but why does that matter to me?” Well to that I ask, do you want to work for the rest of your life, or do you want to one day have the option not to work anymore?
If you answered the latter, then investing is crucial to you. Nowadays, only 17% of private companies offer pensions. What that means is that you need to fund your own retirement. Either that, or work until the day that you drop dead.
Now, you can only build funds by saving money that you make. But just saving money is not enough. Inflation is rising at such a rapid rate that by the time you retire, the money you saved today will be worthless. So what’s the solution? Investing! Investing basically hedges your money against inflation while ALSO giving it the opportunity to compound and grow. Learning how to invest as a teenager will give you lots and lots of time for compounding to work its magic and turn your savings into heaps of money.
What Are the Different Investments You Can Make?
Just like the different subjects at school, there are also different investments that you can make. A few common ones are stocks, ETFs/index funds, bonds, real estate, and crypto. Let’s talk about what exactly each one of these is.
Stocks are just little pieces of a company. If I buy Apple stock for $130 today, I will own a tiny little bit of the company (around 0.000000000059% of Apple.) Buy enough stock, and you could own the entire company. Although, in Apple’s case, I don’t think any singular person has access to $2 trillion dollars.
There are two main ways to make money when investing in stocks:
- Capital gains
Capital gains happen when you buy a stock low and sell it high. If I bought the Apple stock today for $130, and tomorrow the stock went up to $140 and I sold, I would have made capital gains of $10.
Dividends, on the other hand, happen when you hold onto a stock. Oftentimes companies will issue little reward payments for owning their stock. It’s like a Starbucks loyalty program, but with company shares. Say you buy $1000 worth of Starbucks stock. Their annual dividend is around 1.8%. What that means is every year, they’ll give you $18 just for owning their stock. Free money!
Stock prices change for a variety of reasons, and there are millions of dollars out there paid to people just for trying to figure out exactly which way stocks will move. For the purposes of investing for the long term, however, this should not be concerning. After all, what happens to the price today won’t matter to you if you don’t plan to sell your stocks until you’re retired 😉
ETFs / Index Funds
ETFs and index funds are just bundles of stocks. Instead of buying just one stock, if you buy an ETF or index fund, you automatically buy a whole bunch.
For example, the S&P 500 Index tracks the 500 biggest stocks in the United States (Apple, Amazon, Google, Facebook, etc.) They work exactly like stocks where you can make money through capital gains or dividends. The only difference is that they are highly diversified.
There’s a lot of debate regarding stocks vs. ETFs / index funds. Some say “buy stocks because they have higher upside potential,” others say “no no no if a stock plummets you ain’t getting your money back.” Personally, I don’t trust myself enough to buy stocks that will go up… so I just buy them all using an ETF! Great investors always say that diversity is key, so what’s more diverse than owning as many stocks as you can!
Of course, like anybody, a small voice in my head tells me “You can do it! You can beat the market!” So just to satisfy that part of my brain, I allocate a tiny amount of my total portfolio to picking individual stocks. I probably won’t end up beating the market, but this is money that I’m okay with losing.
Real Estate, probably the most common “asset” is very popular among “investors.” The reason that I put quotation marks around “asset” and “investors” is that a lot of people strongly believe that their residential home is an asset and that they are investors when that is not quite accurate.
“Hey but if I buy a house at $100k, live in it for a bit, and then sell it later at $110k, isn’t that capital gains? Isn’t that investing?” Yes and no. Yes that is capital gains, but no it’s not really investing. As previously mentioned, the main goal of investing is taking money and making more money with it. The thing about real estate that violates this is that there are so many other costs associated with it. Every single month that you live in a property, you need to pay for gas, electric, water, property tax, and a whole slew of other expenses.
Oftentimes when you add all that up, even factoring in the potential gain on the sale, you are losing money. No real investor has ever walked up to a deal and said “boy I hope this loses me money every single month,” yet that’s exactly what happens when you live in your property.
How real estate CAN be an asset, is if it’s a rental property. This way, you can buy a property, rent it out so the monthly expenses are covered, and then sell it later on for more money. THAT is real investing. As a teenager, this might be tough to do because real estate usually requires a lot of money, but that’s why there are REITs. REITs are basically stocks that you can buy tracking the performance of certain rental properties and can give you quick and easy access to real estate investing.
We have come to the highly controversial topic: cryptocurrencies. You’ve probably heard of these: bitcoin, ethereum, dogecoin. Cryptocurrencies are relatively new, and are a super volatile investment which should only be considered if you fully understand it.
There is so much about crypto and literal books have been written just on the topic. In a hugely condensed fashion, cryptocurrencies are:
- Decentralized (can’t be touched by the government or banks)
- Peer to peer (goes directly from one person to another and doesn’t touch a bank)
- Digital (there’s no actual money that you can feel or touch)
Just like stocks, you can buy and sell cryptocurrencies on exchanges. But unlike stocks, some cryptocurrencies have HUGE volatility. What this means is one day your portfolio could be worth $10,000 and the next day it could only be worth $500, and vice versa.
Warren Buffett once said something along the lines of “only invest in what you understand,” and that statement is especially true for cryptocurrencies. Do NOT invest in anything unless you know exactly what you’re getting into.
How to Get Started
With any investment, it’s important to do your research before beginning. There is a very real possibility of losing a lot of money, so make sure to be prepared and to know what you are buying before you make any transaction. That being said, if you are willing to try your hand at investing, here’s how to start!
- Do your research about which type of investment suits you
- If you have decided on stocks, ETFs/index funds, or REITs, open up a brokerage account (this can be with Fidelity, or TD Ameritrade, or whatever brokerage you choose)
- Carefully research exactly what you’re going to buy and educate yourself on it
- Go to your online brokerage and make the purchase!
- Leave your money alone and watch it grow over time
- Let your money compound for many many years and become financially free!
Investing is really as simple as that. That being said, this only covers a handful of investment types so if you want to explore further (like actual real estate, or vending machines), these steps will not cut it. You’ll need to do your own research and solve your own puzzles. If done right, however, all investment types can be very rewarding and help significantly with achieving financial freedom.
With more and more employers not offering pension plans, the burden of retirement funding falls on the shoulders of you. Beginning to invest as a teenager is one of the best ways to do so. Through investing, you can not only preserve your purchasing power, but compound it over time and potentially build long-term wealth!
A few different investment types are:
- ETFs / index funds
- Real Estate
So, you know the benefits of investing, and as a teenager, time is on your side. This post has also laid out exactly what steps you can take to start. What are you waiting for? Get out there and start building wealth! Your future self will thank you for it.