Investing is an extremely important part of being wealthy and is how many Americans are able to build wealth and retire. While most Americans know about investing, people often underestimate the power of it and how great of a tool it can be to achieve financial freedom. Additionally, the earlier you start investing, the more powerful it becomes. Because investments grow at an exponential rate, meaning it builds onto itself, investing earlier will leave you with a significant larger retirement sum than if you had chosen to wait.
There are many ways to invest your money and make it work for you. One of the most common forms of investment is investing in the stock market. Essentially, a stock is simply buying a “share” or “portion” of a company. Think of a pizza, imagine the whole pizza is a company and each individual slice represents one “stock” of that company. Investing in stocks can generate some high returns, but there is also an inherent risk in investing in stocks. To find more information about stocks, there are some great resources attached at the end of the article.
Now that you have some foundational knowledge about the stock market you may be wondering, how do I start investing? To begin investing, the first step is to open up a brokerage account. A brokerage account is simply an online platform that allows you to buy and sell stocks and other securities. You can even set up a brokerage account for someone under the age of 18 known as a custodial account. Setting up a custodial account for your child will certainly give them a huge head start financially. When you’re done reading this article, there are some great resources on brokerage and custodial accounts.
But how do you know what to invest in? There are over 25,000+ publicly traded companies, so trading stocks can be a bit overwhelming at first. Thankfully, there are plenty of ways to simplify investing. Some common ways are Mutual Funds and ETF’s. A mutual fund is a group of stocks and other assets that are professionally and actively managed in exchange for a small fee. All mutual funds vary on risk/reward levels and holdings so make sure to do some research before you purchase one! ETF’s are also groups of stocks like mutual funds, although they are not professionally managed. Typically, they track an index like technology, energy, healthcare, etc. Although Mutual Funds and ETF’s can be better for beginner investors, it is still important to do your research or talk to a financial advisor before purchasing. There are a few resources attached at the end of the article.
Stocks are also not the only form of investing. Another popular way to invest is buying bonds. A bond is essentially lending money to the government or a company in exchange for a promise to get back the money back plus interest on a later date. A good example is loaning the US Government $100 today and receiving $105 two years from now. Bonds, like stocks, have risk depending on which government or company you are loaning funds.
Now that you guys have all of the necessary knowledge to help your child start investing, it is time to find some investable money! Start by encouraging your child to earn and save money whether that is saving gift money, starting a business, getting a job, or any other way to earn some money. You could also incentivize your child by matching the money he/she earns to invest in stocks. Once the money is saved up, explain to your children about the stock market and make sure they are involved in picking the stocks. Allowing some autonomy in the stock selection is extremely vital because it will keep the children engaged. If they can invest in a company they are interested, they will be more inclined to pay attention and invest more in the future.
As you can see, investing is not as scary as people make it out to be and anyone is fully capable of investing. Also, investing early is extremely important because it will help you generate significant income for the future and can lead to a significantly better quality of life for your child one day. Most importantly, investing early will help your child learn about the value of money and hard work and will undoubtedly help your child in the long run.
How the stock market works: https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp
Best online brokers: https://www.investopedia.com/best-online-brokers-4587872.
Custodial Account: https://www.investopedia.com/ask/answers/can-someone-not-yet-legal-age-open-brokerage-account/
ETF’s and Mutual Fund’s: https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp