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Investing basics for teens

Key takeaways

  • Connect the world of investing to real life.
  • Make the world your classroom.
  • Help teens take advantage of the magic of compounding.

If you have teens, whether you try to or not, you give them personal finance lessons daily—and have been for years. From basics like earning, saving, and budgeting, to how to give back through the charitable causes—your teen has been paying close attention to everything you do, including how money is managed at home. What they learn from you could help set the foundation for their relationship with money for their lives.

One financial topic that's not often taught is personal investing. It's wise to teach your teen the basics of investing—so they get the facts from you and not some version of the facts from their friends.

Talking to your kids about money

Explore more stories that can help facilitate money conversations with your children and teens.

No matter who you are, when you're first learning, investing can seem overly complicatedespecially the terminology. However, if your teen is interested, it's worth your effort. With many years ahead to invest, they can harness the power of compounding potential to help their savings grow and build a strong financial foundation for their life goals. Here are some tips to help teach healthy investing habits.

1. Teach teens the basics of investing

Help them understand investing terminology and concepts. Start by breaking complicated words and topics into simple terms. For example: A bond is just a loan that you (the investor), make to a company, government, or government-sponsored entity. In exchange for loaning your money, the borrower will pay you interest over time until the bond matures, which is the date when you get the principal you invested back.

A stock is also not complicated when you break it down. When a company wants to raise money, it can sell pieces of itself as shares of stock. If you buy a share, you're a shareholder—and part owner of the company.

There are also various funds that any investor should know about. When you buy a share of a mutual fund, your money is pooled together with other people's money to buy a collection of stocks, bonds, and other securities. Similarly, a share of an exchange-traded fund, or ETF, represents a variety of different investments. Each of these fund types has its own nuances, which you should familiarize your teen with as they continue to learn.

Read more on Fidelity.com: Understanding how mutual funds, ETFs, and stocks trade

No matter what you invest in, the intention is to make money—but there are no guarantees. You are taking a risk for the opportunity of making more than what you started with. Teaching your teen the fundamentals of investing shouldn't stop at definitions. They need to know about asset allocation, risk tolerance, and diversification, and more.

Read Viewpoints on Fidelity.com: How to start investing

2. Start with companies your teens know

Challenge teens to design a portfolio, or collection, of companies they know. Ask them questions like: What clothes or shoes do you wear? What are your favorite tech devices? What streaming services do you use?

They can also explore the habits of other consumers. Ask them: Where do people go for entertainment? What foods are most popular? Encourage your teens to look at trends that create demand for new products like the move toward exercise, healthy eating, or cars that pollute less. Ask your teen to think about how these consumer desires can affect investing opportunities now, and in the future.

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3. Stress the importance of diversification

Ask your teen what they think about the proverb, "Don't put all of your eggs in one basket." You want them to understand that diversifying their investments by buying many different stocks can help guard against "losing eggs" if all your money is in one stock that goes down in value. Not only is it smart to diversify the different types of investments—for example, stocks, bonds, and funds. It's also important to diversify the types of companies and industries. While diversification does not ensure a profit or protect from loss, it can help you balance your risk and reward.

4. Teach teens the benefits of a "buy and hold" strategy

Sometimes it's easy for teens to think that investing in stocks is like playing a video game. Investing is not a game—it involves real money and real risks. In the short term, markets go up and down, often unpredictably. In the longer term, however, the stock market has historically moved upward. Regular investing in quality stocks and holding them for years, not days, has been a good strategy for many investors. However, it's important to be transparent with your teen and explain there are no guarantees in life, and this goes for the world of investing.

5. Teach patience: Show teens how compounding works over time

Albert Einstein said that compound interest is "the most powerful force in the universe." Our kids have time on their side, and the ability to invest over many years. Encourage your teens to find an interest calculator online and see what regular investing at reasonable returns can yield. There's even a simple formula, called the Rule of 72, that can help you figure out how long it may take to double your money at a specific interest rate. The formula is 72/Interest Rate = Years. For example: Let's say that an investment is yielding 7% annually1. You take 72 and divide it by 7 and it shows that the money will double in 10.28 years.

Make it real

To help solidify the basics of investing, try giving your teen some companies and industries to watch and research. Help them make sense of what they discover along the way. If you're comfortable doing so, think about letting your teen monitor your investments with you. Don't forget to explain what you've learned—especially from the mistakes you've made along the way.

Find educational material on Fidelity.com: Teens and money.

The journey of helping a teen learn the ins and outs of investing can be fun and rewarding. However, it's important to always stress there are risks and they can lose money. Starting an investing education and journey early is something that could pay off for years, and years to come. Remember the words of Benjamin Franklin: "An investment in knowledge pays the best interest."

Bonus tip: Keep it interesting

Here's some historical trivia to keep the investing discussion fun.

Wall Street Did you know the concept of a stock market exchange in the US started over 400 years ago on the dirt road in lower Manhattan we now call Wall Street? People came together to trade goods. Others made it difficult to trade, so a wall was constructed to keep them out. Hence the name: Wall Street.

The New York Stock Exchange (NYSE) is the largest stock exchange in the world, and provides a central location for buying and selling stock.

Back in the early days, you had to buy a chair, called a "seat" on the stock exchange in order to trade. In 1817, a seat cost $25. By 2005, the most expensive seat sold for $3,575,000.2

Bull and bear A bull market is a term that represents a market where prices of stock are rising and a bear market is a term for a falling market. But do you know where the terms came from? It's because a bear fights by using his paws in a downward motion, and a bull fights by moving his horns in an upward fashion.3

Help your teen learn about money

The Fidelity Youth® Account gives teens the power to save and invest their money.

More to explore

1. This example is for illustrative purposes only and does not represent the performance of any security.  The assumed rate of return used in this example is not guaranteed. Investments that have potential for 7% annual rate of return also come with risk of loss. 2. Will Kenton, “Seat,” Investopedia, January 16, 2023, https://www.investopedia.com/terms/s/seat.asp. 3. Mary Hall, “Where Did the Bull and Bear Market Get their Names?” Investopedia, November 1, 2023, https://www.investopedia.com/ask/answers/bull-bear-market-names/.

The views expressed are as of the date indicated and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

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