Teaching young adults about investments at an early age is critical in their financial development. Investing in stocks and bonds in your teen years may help you start your own business or lead to an early retirement. Teens should have a thorough understanding of saving money and responsible spending prior to beginning an investment career.
Stocks are one of the most popular investment vehicles for young adults. At 16, most youngsters have some knowledge of the stock market. To begin investing in the stock market, a custodial account must be opened by a parent or guardian. Custodial accounts are offered at most brokerage firms including Charles Schwab and TD Ameritrade. In most cases, you can open a custodial account with as little as $100.
Sixteen year olds are prohibited from making their own trades. Parents should sit down with their teenager and review all potential trades together. This may help prevent submitting incorrect trade or buy orders. Talk about stocks of companies your teen is familiar with or interested in, such as tech or video game stocks.
Bonds provide teenagers with an important investment vehicle that may help them through their college years. Bonds are backed by companies or by various levels of government. Government bonds are one of the safest investment vehicles because it's backed by the government. Bonds are usually long term obligations a government or company must pay to the bond holder. Basically the company or government is the borrower and they must pay you back the stated interest rate plus principal at the date of maturity. Some bonds may be held for 5 or 7 years, while other bonds may be held for 1 year or 6 months.
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Mutual funds provide youngsters with the ability to invest in a group of stocks or bonds. In addition, most mutual fund accounts can be initiated with a $250 deposit. As with the stock market, teens may run the risk of losing money if they invest in a poorly performing mutual fund. Investing in mutual funds is a great way to help teenagers learn about diversification. Teaching a youngster not to "put all their eggs in one basket" may be a lesson remembered well into their adult years.
Starting a Roth IRA is another great way for 16 year olds to begin to invest in their retirement. The reason a Roth IRA is more attractive for youngsters than a typical 401K or a traditional IRA is that Roth IRAs are taxed in the year the contribution is made. No taxes are applied to a Roth IRA when gains are realized nor when funds are withdrawn. With this being the case, the most favorable time to contribute to a Roth IRA is when you're young, with very little taxable income. A 16 year old who has a job or other earned income may contribute as much as $5,000 yearly to a Roth IRA.