‘Investing’ for Teenagers
By Mudit Kohli
“Someone’s sitting in the shade today because someone planted a tree a long time ago” - Warren Buffet.
The idiom goes, ‘the early bird gets the worm’. The earlier you begins investing, the higher your chances are of understanding the relevance it plays in the financial aspect of life. Compared to others, you will be able to afford a lot more. Additionally, finances may be uncertain at many points of your life, but investments will help get through those hardships. Investing early also helps develop disciplined spending habits by driving attention towards budget as well as cutting expenses.
How to earn personal financial independence is not often exposed to us in school or college, which leaves one unable to figure out how to manage their own money. Understanding how investments work would be a huge leap into achieving a sense of pride in our financial future.
For a hands-on experience into learning how investments work, here are a few basic tips into how a teenager could explore their way into the world of investing:
#1 Gain stock knowledge
Without an understanding of the basics behind the stock market, you may be putting yourself in a major risk of losing whatever little money gathered in order to invest and compound. Freely available online websites, Youtube videos and even courses on platforms such as Udemy or Coursera would be significant in helping you understand the stock market. After understanding the basics, experimenting with dummy portfolios is a great method to tackle the fear of taking your first step into investing. Platforms such as Investopedia and TeenVestor Stock Game allow you to compete with your friends to see who has the highest profits in hypothetical portfolios you create with fake dollars.
#2 Understanding technical and fundamental analysis
Technical analysis is a tool through which probable future price movement is predicted. The purpose of this tool is to help the investor make a better decision with regard to stock investment. The supply and demand of stocks are dependent on technical analysis. With the help of technical analysis, you are able to identify the following factors:
Instability of the stock prices in the past and present
Stock value as compared to the overall market trends
History of trading levels
Read more about technical analysis: https://zerodha.com/varsity/module/technical-analysis/
Fundamental analysis is a tool through which economic and financial factors are taken into consideration to measure a stock’s intrinsic value. Using this method, one can study the microeconomics as well as the macroeconomic factors affecting a stock’s value.
#3 Understanding the power of compounding
It often seems to be the case that we tend to ignore the power of compounding. Albert Einstein had once said "the magic of compounding lies in the fact that it can help investors multiply their returns over the long-run". Simply put, it is a long-term investment strategy. Two key components are required in the process: reinvesting and time. Reinvesting the interest generated on an investment, your returns start earning themselves. This is where your money works for you to generate more wealth. Compounding has the ability to generate enormous amounts, if invested in the right assets.
Read more about the power of compounding: https://www.nirmalbang.com/knowledge-center/power-of-compounding.html
#4 Avoiding scams
Here is a list of red flags introduced by the Security and Exchange Commission that people should look out for when coming to an investment decision:
It sounds too good to be true
Any investment that promises you a substantially more interest than the readily available indexes could be very risky.
An unexpected high ‘guaranteed return’
If a company ensures a ‘guaranteed’ return which tends to be extremely high and unexpected, there is bound to be a risk involved.
A company that is not well-known
Spend some time on doing the technical and fundamental analysis of the company you are trying to invest in. If valid information is missing while you do your research, you may want to watch out.
Being pressured to invest that instant
Lastly, fraudsters try their best to create a sense of urgency by letting you know that this is a ‘once in a lifetime opportunity’. However, it is imperative to complete your research and double-check before making investment decisions, so that you do not put yourself at any risk.