What’s up, guys! So, you want to get into the stock market? (If your parents are making you read this, it’s okay, you’ll end up thanking them later!)
When most people are introduced to the idea of the stock market for kids, it can seem like a pretty hard concept to understand. Numbers, graphs – what the heck is a stock in the first place? You might be wondering about all these things but, in reality, it’s actually not that hard to understand once you break it down. We can even teach the stock market to elementary students. The best part is that it is super beneficial for young people to understand and take advantage of stock trading. In fact, the younger you are, the better off you’ll be in the long run.
I’m getting ahead of myself. For now, let us focus on the basics of the stock market explained for kids and teens.
What is the stock market?
Let’s look at stock trading for kids. In order to want to start investing in the stock market, you have to know what it actually is. Essentially, the stock market is a place where people can buy and sell stocks, which is a part ownership of a company. Don’t let this get you confused, though! The stock market is not necessarily a physical place but you can watch the market through continuous updates on your smartphone or computer.
Can only stocks be traded on the stock market?
Stocks, or shares, are not the only securities that can be traded on the market. Bonds, mutual funds, and Exchange-Traded Funds also are bought and sold. I’ll go into further detail about each one below:
Bonds
A bond is a loan from an investor to a borrower and they are sold by companies or governments to investors. The entire amount of the bond has to be paid back (plus interest) by a certain date.
Still not entirely sure? Let’s go through a scenario. Imagine you have a pair of boots and your friend wants to borrow them. You both agree that your friend can have them for a month. After that time is up, your friend returns the boots and in addition, gifts you a new pair of socks. Bonds are very similar to this.
There are also other types of bonds where investors receive a fixed income, meaning investors receive a consistent and set amount of income from the borrower. Let’s take our boots example. While your friend is wearing your boots for the month, they also give you a pair of socks each week until they give them back. The socks would represent fixed income.
There are many different types of bonds that can be bought such as corporate bonds, government bonds, and junk bonds (these are bonds that carry high risk, but can have a high reward). Municipal bonds are issued by local, county, and state governments and are commonly used for capital expenditures such as property, buildings, and equipment.
Mutual funds:
These bad boys are like baskets of securities that trade on an exchange just like stocks do. In other words, mutual funds are monies that are placed into different types of investments such as stocks and bonds. It’s a way for individual investors to proportionally invest in portfolios that are professionally regulated by large financial firms, and they are managed by a funds manager who is paid a fee for deciding what to invest in.
Exchange Traded Funds (ETFs):
Like mutual funds, Exchange Traded Funds are a pooled investment security that track a particular stock, sector, or commodity. The difference is that ETFs can be traded at the market price throughout the day. Mutual funds are bought and sold only once a day at a set dollar amount. This means that the share prices of ETFs fluctuate all day as it is bought and sold.
In comparison, mutual funds are not traded on an exchange and can only be traded once per day when the markets close.
Since ETFs generally contain several individual stocks, they are well-diversified and a popular addition to several investors’ portfolios. As a result, some have had greater returns than many individual stocks over the long haul. Investors can save time and money with ETFs, as less time is needed to track individual stock picks. Find out more about individual stocks vs EFTs.
What does it mean when you buy a share of a company’s stock?
This might be the most crucial part of our article, and no doubt is the question that has been on your mind. I have given you some background on the stock market but you might still ask yourself, ‘what do I get out of buying a part of a company anyway?’. Well, I’m glad you asked. When you buy a share of a company, it means you are entitled to some company benefits.
First, you get that money! Woo! When you invest in a company, the company will then use those funds to run their business. Then the company will give you back money (also known as dividends) in return if they are successful. To be more precise, a dividend is an allocation of earnings to stockholders. The more stock you own, the more dividends you will receive. For the majority of the time, the money is given quarterly or about three times a year. Dividends can also be distributed in the form of additional company stock. Dividends can vary depending on how well the company is doing. This is why people watch the market so they can be more involved with their stocks!
Why do prices across the stock market go up and down regularly?
You might have noticed that stock prices change all the time.
No seriously. All day, every day.
For example, the current price of Disney’s stock is $107.54. Fifteen minutes ago it was $107.36 and an hour ago, the price was $107.86. For you reading this article, the price will be entirely different – it will have gone up or down again. So, why does this happen? Why is it always changing? The answer is actually quite simple. In a short-term sense, supply and demand is the reason for the constantly changing prices. If more people want or demand a certain stock, then the price will increase. When a price goes up, owners are more likely to sell their stock in order to make a profit. On the other hand, when a price is going down, then the demand is lower. Once a stock is at a decreased price, investors are more likely to buy it. Just like a real marketplace, the key is to buy low and sell high. That is how you get the money to start rolling in!
What are the key factors that can impact stock prices across the stock market?
We’ve mentioned short-term factors that influence stock prices, but what about the long term? The concept of supply and demand definitely impacts stocks, but there are other factors that impact the price in the long run. Going back to our Disney stock example, today it is around $107, but just two months ago it was close to $90. Not only can these factors impact one stock but it can impact all shares across the board.
Let’s take a look at what also affects stock prices:
Inflation
You might have heard this term recently because we are seeing inflation now. This is a monetary factor that happens when there is a general increase in price for goods and services. Inflation impacts the market because if the cost of living goes up, people will tend to be more money-conscious, and therefore, they will end up spending less.
If the demand is low then… you guessed it! Prices drop. While this may not always be the case in every situation, overall, inflation injects uncertainty into the market.
Investor Sentiment
Remember back in 2016 when Pepsi launched a commercial with Kendall Jenner and received major Twitter backlash? Side eye. As a result, the company brand value dropped 4% and even Coca-Cola took a hit. Once bad news spreads about a certain company or industry, the stock price can fall because investors think that the company will suffer as a result. However, people can also influence stocks in a good way. When Elon Musk tweeted “Gamestonk!!”, it caused a 352% surge for the Gamestop stock. This is because Elon Musk is one of the most vocal and influential celebrities. His words are as good as gold to many investors. The concept of investor sentiment refers to the feelings people have towards a company or industry that impacts how they invest.
Politics
This can refer to governmental policies such as possible changes in interest rates, or even negotiations between countries. Since trading happens internationally, markets and economies are connected so if something happens in one country, it can impact stocks due to their specific ties.
Natural Crisis
COVID-19. I really should stop there because we all know what happened. Need I say more?
When COVID struck, many people were left without a job, which caused people to spend less. Once it was announced that everything was shutting down, almost every stock dropped almost immediately. Other crises like earthquakes and hurricanes can also affect the market because it impacts people’s personal assets, property, and finances.
Different types of stocks
Now, I can’t teach about the stock market for kids without explaining the different types of stocks, right?
There are a few different types of stocks. Each type has its own unique set of characteristics and risks.
Let’s take a look at a couple of stock types and explain the difference between them in simple terms:
Income stocks vs. Growth stocks
Income stocks are a particular kind of investment where dividends are paid to the investor. This means that these stocks provide regular income as dividends. These are also classified as a less risky investment. Additionally, income stocks come with a high yield. A yield is the amount earned on a security or investment over a certain period of time. In other words, if you play your cards right, you can pretty much get a good amount of money from income stocks. You should be mindful that some of these stocks are a little pricier than others because they are almost guaranteed a regular, steady income.
Here are some income stock examples:
Walmart (WMT)
IBM Common Stock (IBM)
Altria Group Inc. (MO)
Shell Midstream Partners LP (SHEL)
*If you are wondering what the abbreviations are for, they are called ticker symbols. Its like a nickname for a certain company that is recognized on the stock exchange.*
On the other hand, growth stocks are stocks that companies expect to grow at an above-average rate. However, these stocks normally do not pay dividends. Instead, they are usually reinvested to maximize a company’s profit. These stocks are also known to be more expensive because they have a higher return than the average stock. Most companies that are growth stocks are either young or technology-based businesses like Amazon and Netflix. As opposed to income stocks, growth stocks reside on the riskier side of investments because they can have a big reward but they can also have huge losses.
Here are some popular growth stocks:
UFP Technologies (UFPT)
Hostess Brands Inc. (TWNK)
E.L.F Beauty Inc (ELF)
Mastercard (MA)
Preferred stocks vs. Common stocks
The main difference between preferred stocks and common stocks is that if you have ownership of preferred stocks, you do not have voting rights. You see, a privilege that comes with investing is that investors in a company can elect the board of directors or vote on company policies, since they technically own part of that company. However, let’s say a company has to declare bankruptcy or goes out of business. In this case, preferred stock investors have dibs on that company’s assets before those with common stock. Not only that, but investors of preferred stocks are paid in set and regular dividends and if one payment is missed, they will also get priority over those who have common stock. A downside to this is that it is harder to get a high reward, just like bonds.
On the other hand, we have common stocks. When people are referring to stocks in general, this is the type of stock they are usually talking about, hence the name ‘common’ stock. These types of stocks come with voting rights, so shareholders have a say in the management and policies of that company. They also tend to outperform preferred stocks and can do better in the long run, but it very much depends on the health and performance of the business.
Cyclical stocks vs. non-cyclical stocks
Cyclical and non-cyclical stocks basically refer to the relationship between the share price of a company’s stock to the nature of the economy. Let’s go deeper. Cyclical stocks follow the trend of the economy. In other words, if the economy is doing well, then the stock tends to also. Examples of cyclical stocks include restaurants, hotels, and automobiles.
Here are some examples:
General Motors (GM)
Boeing (BOEING)
MGM Resorts (MGM)
On the other hand, non-cyclical stocks tend to outperform the market in spite of the economy’s state. For example, necessities such as food, gas, and pharmaceuticals. They are useful to avoid losses when cyclical companies are not performing well.
These include:
Coca Cola Consolidated (COLA)
Philip Morris International (PHILMO)
General Mills (GENMILS)
Understanding the risks of investing
While investing is a wonderful way to generate money, especially in the long run, I have to remind you that it comes with risks. However, different types of investments offer different levels of risk, so it’s important you do your own research and see what best fits you, your financial situation, and your personal financial goals. One potential risk is that a company will not do well, which results in lower dividends. However, another, less-obvious form of risk lies in the investor themselves, too. Sometimes, an investor can get overly confident and start making decisions that may not be the best. On the other hand, an investor could be doing poorly and want to give up. Investing is a ride with lots of ups and downs. Understanding that there will always be risks involved is important to know if you are serious about investing and maximizing the money you can make.
How old do you have to be to invest in stocks?
Long story short, you are never too young to begin your financial journey. It’s important to start saving as early as possible because your money will have more time to grow with compound interest. To put it simply, compound interest is interest-upon-interest, where your money grows exponentially so you can accumulate great wealth. It’s as important as it sounds, so check out our how-to guide on compound interest.
Naturally, you will want to save the money you make from investing. If you are under 18, you cannot legally hold shares in your own name (more details on that here). However, that doesn’t mean you cannot invest – you can use a custodial account!
Custodial accounts
- Custodial accounts are a type of account that parents or guardians can set up and manage on behalf of a minor. Until the beneficiary turns 18 (or 21, depending on your state’s laws) all assets, capital gains, and tax liabilities belong to the parent, who has total ownership and control of how money is spent and invested. The child will take over the account when they become a legal adult.
How to open an investment account for your children
- Invstr Jr is the best way to begin your child’s financial journey. Not only does it teach children vital money management skills to build generational wealth, but you can open a custodial account. It is a safe and secure way to teach your child how to invest and you receive real-time updates when your child suggests a stock to invest in, which you can either approve or deny.
If you are a US citizen, setting up a custodial account with Invstr Jr is simple! All you need are your child’s full name, Social Security Number, and date of birth.
You can check out our ‘What Is A Custodial Account?’ blog for more information.
Conclusion
All in all, while the stock market can seem like a complicated idea to understand, investing is not just for grown-ups but the stock market can be for kids and teens, too. The stock market can really be for anyone who is willing and ready to learn. That’s why our motto at Invstr is ‘Investing for everyone’.
It’s easy to get started, and as I have explained in this article, it’s not as complicated as it seems. Investing may not be all peaches and cream 24/7, the benefits are going to be better than you ever imagined.
If you want to get started, Invstr is an award-winning educational investing app that is great for beginners. Invstr Jr is geared towards teaching the stock market to elementary students, high school students, and everywhere in between! It’s the ultimate stock market app for families and even includes special features like goal and allowance setting technology, so you can use various financial skills. It’s a one-stop shop for all your investment needs.
Happy investing!
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Invest in your child’s future with a stock trading account for minors.
