By SmartAsset Team

A mother and her teenager discuss early investing.

Teaching your teen about investing in stocks helps build financial literacy and encourages smart money management. Learning these skills early can help them make informed decisions about spending and saving for the future. A financial advisor can provide guidance on beginner-friendly investment options and strategies to help teens develop good financial habits. 

Why Early Investing Is Important

Starting to invest at a young age can make a big difference in long-term financial growth. The earlier you invest, the more time your money will have to grow through compound interest. This means earning interest on your money and the interest it has already made over time.

Investing early also helps build good financial habits. Learning how to save, manage risks and make smart investment choices prepares individuals for future financial decisions. It also allows for more flexibility, as early investors can take on long-term strategies without the pressure of needing quick returns.

Finally, investing early can better prepare a teen for major life expenses like buying a home, starting a business, or retiring comfortably. It also reduces the need to save large amounts later in life and can provide financial security. 

How to Invest in Stocks for Your Teen

To begin investing, your teen will need a custodial account. This type of account lets a minor own stocks while an adult manages it. Most brokerage firms offer custodial accounts, making it easy to get started.

These accounts can hold different investments like stocks, bonds and mutual funds. As the custodian, you manage the account until your teen reaches adulthood, when they take full control. This setup allows them to learn about investing while having guidance along the way.

After setting up the account, talk about investment strategies. Teach your teen to focus on long-term growth instead of quick profits. Explain the importance of diversification to reduce risk and introduce concepts like dollar-cost averaging. Encourage them to research companies, read financial news and understand market trends to help position future investment decisions.

Other Investment Options for Teens

Teens have several investment options beyond stocks to help them build a strong financial foundation. Here are four common ones to help them get started:

  • Index funds are a great way to teach teens about the benefits of diversification and compound interest. By investing in index funds, they can gain exposure to a wide range of industries and companies, which could help inform their financial decisions into adulthood and retirement. 
  • Exchange-traded funds (ETFs) offer the same diversification benefits as index funds but trade like stocks on an exchange. This feature can be attractive to teens who are interested in more active trading. 
  • Dividend stocks pay out a portion of the company’s earnings to shareholders, providing a steady stream of income. For teens, dividend stocks can serve as an introduction to the concept of passive income and the importance of reinvesting dividends to grow wealth over time.
  • Roth IRAs are another common option to earn income. Since these accounts do not have a minimum age requirement, teens can contribute earned income up to the IRS limits. This can offer tax-free growth and withdrawals in retirement, which can instill a long-term investment mindset.

Investing Tips for Teens

A mother and her teenage son review an investment portfolio.

Investing in stocks early can teach teens valuable money lessons. Here are four general tips to get started.

Start With a Budget

Establishing a budget helps teens understand how much money they can allocate towards investments without affecting their daily expenses. A well-planned budget will allow them to invest responsibly and not over-extend their finances.

Educate Yourself

Knowledge is power when it comes to investing. Take the time to learn about different types of investments, such as stocks, bonds and mutual funds. Knowing the basics will help teens avoid making costly mistakes later on.

Think Long-Term

Investing is not about getting rich quickly; it’s about building wealth over time. Focus on long-term goals and be patient with your investments. Earning compound interest means that even small, consistent investments can grow significantly over years.

Diversify Your Portfolio

Diversification is key to managing risk in your investment portfolio. By spreading your investments across different asset classes, you can protect yourself against significant losses if one investment performs poorly.

Bottom Line

A father and his teenage son comparing different stocks.

Learning how to invest in stocks as a teenager can be a transformative experience. It offers valuable lessons in financial literacy and responsibility. As a parent, guiding your teenager through this process starts with the basics to help your teen understand fundamental concepts such as stocks, dividends and market fluctuations.

Investment Planning Tips

  • A financial advisor can help your teen understand how to make long-term investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you want to know how much your investments could grow over time, SmartAsset’s investment calculator can help you get an estimate.

Photo credit: ©iStock.com/klebercordeiro, ©iStock.com/Imgorthand, ©iStock.com/JLco – Julia Amaral

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