Teen learns the first rule of investing
Recently I had the pleasure of sitting down with Lucy Brewster, a 14-year old who was getting ready to go to a new school. Lucy had a number of financial questions and wanted to sit down with a financial advisor to talk about money, spending, and saving.
Lucy mentioned that through her school she participated with a group of students to play the "stock market game." They picked one stock -- Tesla Motors (TSLA) -- and "lost" a lot of money when that stock tanked on reports that one of the cars made by the company caught fire when it was involved in an accident.
I explained that the biggest mistake they made was to invest in a stock that was moving up on momentum and had no earnings yet, so the slightest bit of bad news can set off a big decline in the stock.
But buying a few shares of stock or a mutual fund can be a good tool to learn about investing, especially if it's the stock of a company that makes both regular profits and products you use and understand. The best way to proceed is to look up the investor information on a company you are familiar with to see if the company has earnings or profits.
The key point is to look to invest in stocks where the company is earning a profit and you understand their business. Next is to never invest all of your savings in one stock or a single mutual fund. While the stock market game Lucy played with her classmates at school probably required them to pick one stock, she learned a lifelong lesson about the importance of diversification: Never put all of your eggs in one basket. And even though mutual funds provide diversification and professional management, it's still important to diversify and own several funds, rather than a single one.
Brokerage Accounts for Minors
If you are under age 21 and you want to invest in shares of stock or a fund, then you'll need to open a special type of account called a custodian account. In this type of account, the parent is the custodian and the child is the beneficial owner. When you reach age 18 (or 21, depending on your state's laws pertaining to custodian accounts), then the account can be converted into your own name.
Buying Shares of Stock
Another option for buying a few shares of the stock of companies that make products you use such as Apple, Google or Under Armour is to do so in certificate form. Check out several services such as Oneshare.
For about $40 to $80, plus the price of the stock, these companies will prepare a matted and engraved setting to frame the stock certificate of your choosing. A teen investor can be the registered owner on the stock certificate where the parent is also named as the custodian, so no brokerage account is required. But I recommend opening a brokerage account instead, as you'll save the cost of this service as well as have an account ready to accept deposits as you save and invest more money in the future.
