7 Steps to Start Investing as a Teenager  

by Emmanuel Modu, Author of TeenVestor: The Practical Investment Guide for Teens and Their Parents

Updated: January 2, 2024

Teen Investor

Teen Investor

 The 7 steps to start investing as a teenager are as follows:

  1. Gain Basic Stock Knowledge

  2. Identify Investments Appropriate for Teens

  3. Learn What Companies Do

  4. Get & Use Financial Data

  5. Experiment With Dummy or Mock Portfolios

  6. Choose the Right Custodial Brokerage Account for Teens

  7. Avoid Investment Scams

More details can be found below.

#1. Gain Basic Stock Knowledge

The first step for teen investors (Teenvestors) and beginning investors is to learn the basics of stock investing. Without an understanding of investing fundamentals, you run the risk of quickly loosing whatever little money you cobble together to start building your nest egg. The problem is that many of the resources for beginning investors are not appropriate for teens. These resources are simply not produced in simple language that teens can understand.

There are many free resources at your disposal to learn about investing.

  1. TeenVestor.com – Our site is the only portal on the internet with a full array of free educational material for teen investors and their parents. We teach teens about stocks, funds, the economy, etc. See press materials here about us.

  2. Andrei Jikh (Youtube Channel) – This is a good Youtube channel resource that teaches basic investing and economic concepts for beginning investors. But do not under any circumstances take investment advice from this channel or any other Youtube channel.

  3. TeenBusiness (Youtube Channel) – This is the only channel that is fully devoted to the teen investor and entrepreneur.

  4. Investor.gov – This site is run by the Securities and Exchange Commission (SEC) which regulates securities in the United States. The site provides investor education for teens covering stocks, ETFs, and other investments. It even covers cryptocurrency.

  5. Investopedia — Investopedia has an education-focused website that covers beginning and advanced investors. The website has a great dictionary of all basic investment terms that are well defined complete with relevant articles. Investopedia has been a trusted source for investing information for many years.

  6. How the Market Works – This website, which also runs a stock market trading game, also has an education section with some lessons about the stock market.

  7. Wall Street Survivor – This website, which also runs a stock market trading game also has an education section with some lessons about the stock market.

Another way to get knowledge about the stock market is to sign up for some online courses. We offer the TeenVestor Stock Certification Course which consists of text, video lessons, and quizzes to help teenagers understand the stock market. There are other online courses available offered at platforms like Udemy to teach you about the stock market. Please click on the course image to learn more about our course.

 

#2. Identify Investments Appropriate for Teens

The best Investments for teenagers can range from stocks to exchange traded funds to some low-risk assets such as treasury bonds. No matter the investments, a teen investor under 18 years old can’ t make his or her own investment. They need the involvement of an adult — typically a parent — to open a custodial brokerage account or to authorize or to authorize the purchase of an investment. Details of how your parents can open a custodial account so you can buy stocks and funds can be found here: Best Custodial Brokerage Accounts for Kids.

How Teens Can Start Investing in Stocks

You may want to get started choosing stocks based on your own interests. By looking for stocks in which you have an interest, you are likely to be more engaged in trying to understand how the stock market works. Here are some hints about what to consider when choosing stocks as a beginning investor:

  • Your hobbies

  • Businesses in which your relatives work

  • Companies discussed in business publications like the Wall Street Journal

  • Companies headquartered in your state

  • Big companies included in an index such as the Dow Jones Industrial Average or our index, The TeenVestor Index Portfolio shown in this article: Stocks for Kids.

  • Companies that produce some of the items your friends and classmates like

With regards to companies that produce items teens like, a company called Piper Sandler does a survey each year of over 7,000 teens to discover what brands they like and use. These include brands of shoe companies, restaurants, snacks, clothing, and many other consumer items and services young people use. Basing stock purchases on brand recognition may not be the best way to decide what stocks to buy, but the companies in the survey may give you some initial investment ideas. Later, when you get more experienced in investing, you can do fundamental research to see which stocks are worth your money.

Here is a list of some of the top brands that may be of interest to teen investors:

Exchange-Traded Funds: The Less Risky Investment for Teens

If you want to invest in assets that are not as risky as investing in just a handful of stocks, you should consider investing in index-based exchange-traded funds (ETFs). ETFs are investments that represent a diversified group of companies that trade just like stocks. They are like mutual funds, except you can buy them the same way you can buy stocks through your online broker. 

The particular type of ETFs that would be appropriate for teen investors are based on broad market indexes such as the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. These indexes track a wide variety of large stocks, so the volatility of the index-based ETFs reflects the price movements of the underlying stocks. This means that by buying ETFs backed by indexes such as the Dow Jones Industrial Average or the S&P 500, for example, a teen investor is diversifying his or her investments, thus making for holdings of safer assets.

An ETF based on the NASDAQ is a bit of a different story when compared to an index based on the Dow Jones Industrial Average or the S&P 500. The NASDAQ is generally considered to reflect the change in the value of technology stocks. Therefore, a NASDAQ-based ETF will also reflect the values of such stocks as opposed to the entire stock market.

The ETF symbols you need for buying broad index-based ETFs are as follows:

  1. The Dow ETF: SPDR Dow Jones Industrial Average ETF Trust - symbol: DIA

  2. The S&P 500: Vanguard S&P 500 ETF - symbol VOO

  3. The NASDAQ: Invesco QQQ - symbol: QQQ

US Saving Bonds

One of the safest investments a teen investor can make is buying U.S. savings bonds. Savings bonds are loans American citizens make to the U.S. government. You should view these bonds only as a way to save money, not as a way to grow your nest egg through price increases, such as is the case with stocks and ETFs. There are two types of savings bonds: Series E.E. U.S. Savings Bonds (or Series EE Bonds) and Series I Savings Bonds. Both types of bonds are low-risk investments that pay interest for up to 30 years. The Series I Savings Bonds are similar to the Series EE Bonds with one crucial distinction: the Series I Bond interest rate is adjusted periodically based on the inflation rate. 

The U.S. Treasury stopped issuing paper savings bonds – you merely register to buy the securities at the website, www.treasurydirect.gov. Like any other investment, a minor will need a parent or guardian to open up a custodial account in their name.

#3. Learn What Companies Do

The Annual Report

As a starting point, you should get a copy of the annual report of the company in which you may want to invest. An annual report is a document used by most public companies to disclose corporate information to their stockholders every year. It is usually a state-of-the company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs.

The 10-K

Sometimes, companies may use something called a “10-K” as a substitute for their annual reports. The 10-K is a filing required by the US Securities and Exchange Commission of all public companies. It contains much of the same information that companies put into their annual reports. A company like Apple, for example, uses the 10-K as its annual report. Here are some links to the annual reports of a few companies you may know:

To get the annual report of any company, you should enter the name of the company in Google and include annual report in the search. For example, you can search for “Coca-Cola annual report” in Google for Coca-Cola’s annual report. This search will most likely take you to the investor relations section of the company’s website showing annual reports for the past few years.

#4. Get & Use Financial Data

At some point, you will want to get more detailed information about a company’s financial performance (such as how much money it makes) compared to similar companies in the same industry. There are many different types of performance measures but you don’t have to calculate them on your own.

Sources of Company Performance Measures

Many financial websites will provide the information you need such as Return on Equity, Earning Per Share, Price-Earnings Ratio, etc. – all important indicators for how companies are doing which you can learn in a stock market course. We use three main websites to get this data for any company we want to research:

Getting Stock Symbols

Before accessing financial information on any company, you need the stock symbol for that company. You should be aware that stock symbols don’t always correspond with the name of the company or its products. For example, Coach Bags are manufactured by Tapestry, Inc. If you want to invest in Coach, you have to purchase stocks in Tapestry, which trades under the symbol TPR. So it’s important to do a little research about the products you want to invest in. This link takes you to the financial information you can get from Yahoo!Finance about Tapestry, Inc.

#5. Experiment With Dummy or Mock Portfolios

Setting up a dummy trading portfolio is one way Teenvestors can overcome the fear of taking that first step in investing. There are a few sites that allow you to set up stock market games in which you can compete with your friends to see who has the highest profits in hypothetical portfolios you create with fake dollars. The sites tally up the daily portfolio values and rank them by usernames. Here are some dummy trading portfolio portals:

#6. Choose the Right Custodial Brokerage Account for Teens

Minors are not allowed to own stocks, mutual funds, and other financial assets outright. In some states, minors are defined as people younger than 18 years old, and in others they are defined as people younger than 21.

Considerations for Opening Custodial Brokerage Accounts

If you are a minor, you can make investments only under the supervision of your parent through a custodial brokerage account. You parent will have to sign you up for a custodial account offered by an online broker. You would own the assets in the custodial account, but your parent would control the investments in it (hopefully, with your help) until you are no longer a minor. Important considerations to choosing an online trading account include:

  • Looking for no stock trading fees – you should find online brokers that charge $0 to buy and sell stocks.

  • Looking for low balance stock trading accounts – make sure the online broker does not require you to maintain a sizeable minimum balance in a trading account; there are many that offer $0 minimum balance.

  • Look for brokers that allow for fractional shares – if you want to invest as little as $1 in reputable companies with high stock prices, you can only do so if the online broker allows you to buy fractions of a share stock.

Teen-Friendly Custodial Brokerage Accounts

Here are some online brokers you may want to investigate:

  1. Charles Schwab (Which Now Owns TD Ameritrade)

  2. E-Trade

  3. Fidelity

  4. Interactive Brokers

  5. Ally Invest

  6. Greenlightcard

  7. Bloom

  8. Stockpile

  9. Stash

  10. Acorns

#7. Avoid Investment Scams

If someone promises you a profit that is much higher than you can get by investing in the stock market each year, you should run unless you really know what you are doing or you don’t mind losing your money quickly. One adage that you should adhere to is this: high profit in any investment usually involves much higher risk.

Comparing Promised Investment Returns to Market Returns

For example, over the long run, the stock market will generally only yield you about 7%-9% interest rate over the long haul depending on what period you are measuring.

Yes, the return on the stock market can be extremely high (if you invest in an index fund that tracks an index like the Dow Jones or the S&P 500). For example, the return on a fund that invested in an S&P 500 index fund in 2020 probably yielded about 16.3% profit. But in 2008, the return of the same type of fund was probably around NEGATIVE 38.5%. So, no one can promise you a steady return each and every year if they invest your money in the stock market.

Don’t Be Fooled: A High Return Always Means High Risk

Anyone who tells you that they would like your money and that they will consistently get you a profit of say, 12% each and every year by investing in stocks (or in any other asset, for that matter) on your behalf is not being truthful about the risk they are taking with your money. We've seen investment offers that promise to pay sky-high interest rates for what are, at best, extremely risky propositions—and at worst, pure frauds. Here is a list of red flags that the Securities & Exchange Commission says should make investors suspicious of an investment offer:

  • It sounds too good to be true. Mom was right! Compare promised returns or interest rates with returns on a well-known stock index such as The S&P 500 Industrial Average. Any investment that promises you substantially more than these readily available indexes is, by definition risky. Risk is not necessarily a bad thing, because with more risk there is the potential that you can make more money. However, you should know how risky something is before investing in it.

  • An unusually high "guaranteed return." Most fraudsters spend a lot of time trying to convince investors that their investments offer extremely high returns, which are "guaranteed." If a person or a company that is not well known tells you that an unusually high return is "guaranteed," watch out!! Even if you know the company, if your guaranteed profit sounds too high, you may not be aware of all the risk involved.

  • A company that is not well known. If you've never heard of a company, broker, or adviser, spend some time checking them out before you make your investment. Most public companies make electronic filings with the Securities and Exchange Commission, or (www.sec.gov), and computer databases exist to help you research brokers and advisers. Your state securities regulator may have additional information. Incidentally, if a supposedly upright financial firm lists only a post office box as an address, you'll want to do a lot of work before sending it your money. And if anyone mentions the words “penny stocks”—stocks that trade for less than $1— run away as fast as you can.

  • Being pressured to invest "right now." Scam artists usually try to create a sense of urgency, making you think that if you don't act now, you'll miss out on a fabulous opportunity. But savvy Teenvestors take time to do their homework before investing. If you're being pressured to invest, especially if it is a "once-in-a-lifetime," "too-good-to-be-true" opportunity that you "just can't miss," just say no. Your wallet will thank you.

  • An investment that is hard to understand. Con artists frequently use a lot of big words and technical-sounding phrases to impress you. But have faith in yourself! If you don't understand an investment, don't buy it. If a salesman isn't able to explain a concept clearly enough for you to understand, it isn't your fault. Don't make it your problem by investing in the product.

Penny Stocks are Terrible for Teen Investors

Teen and kid investors should avoid “penny stocks”. These are stocks of very small companies that trade below $5. Through penny stocks, stock investment scam artists typically hook unsuspecting naive investors. There is nothing necessarily wrong with the companies that issue these stocks. The problem is that because there are usually very few publicly available documents to give investors reliable information about the health of these small companies, unscrupulous brokers and advisors can easily lure naive investors into purchasing these stocks. In addition, the price of penny stocks is easy to manipulate in so-called “pump and dump” schemes. With these schemes, investors will talk up the value of penny stocks they hold and then dump them when the prices temporarily skyrocket, leaving new investors with inevitably lower-valued stocks.

Cryptocurrency and Teen Investors

Before stepping into the crypto world, you should read our article Crypto for Teenagers for the basics of investing in cryptocurrency.

Cryptocurrency is an investment (whether in stock form or virtual currency) that teens and kids should probably avoid for now. The reason is simple — the value of cryptocurrencies and crypto-related investments is too volatile. Bitcoin is probably the most well-known cryptocurrency, but that currency has seen a steep decline in value for seven months. In November 2021, the value of one bitcoin was about $68,000. By June 2022, the value of a bitcoin had fallen to about $20,000 — about a 70% drop in value. What’s worse, some notable bankruptcy filings by some prominent crypto lending platforms in 2022 — namely Celscius, Voyager Digital, and Three Arrows Capital — left millions of customers stranded with very few prospects of recovering their cryptocurrency deposits.

As of early 2024, bitcoin has rebounded considerably — it is vow valued around $45,000. However, caution is still necessary for this asset class.

While cryptocurrency may be fun and exciting to invest in, realize that at this time, it is more like gambling unless you know what you are doing. You may want to wait a little while before diving into the deep end of cryptocurrency investing.