Teens Guide To Investing

What is an Investment Strategy?  According to Barron’s Dictionary of Finance & Investment Terms it means:


"Investment Strategy: a plan to allocate assets among such choices as stock, bond, cash equivalents, commodities, and real estate.  An investment strategy should be formulated based on the investor’s outlook on interest rates, inflation, and economic growth among other factors.  Also taking into account the investor’s age, tolerance for risk, amount of capital available to invest, and future need for capital, such as for financing children’s college education or buying a house."
 

Ok, I realize this is a site for teens and we are not worried about purchasing a house, or our children’s college education (just our own), but this helps teach you about investing for the long term.

This section explains some of the places where you can invest your money; however it won’t tell you how you should invest your money.  As the above statement says each person is different, you have to come up with your own plan. There are plenty of people who can help you formulate a strategy, from Stock Brokers (Stock Brokers & Brokerage Accounts) to Financial Advisors and investment newsletters.  There are also plenty of free "advisors" such as the web, radio and TV, just to name a few (Financial Planners & Other Places For Financial Advice But you must realize there is no get rich quick scheme or only one successful investment strategy.  Even the best financial experts often disagree on what is the best approach or when to get in or out of the markets.  However most, not all, financial professionals suggest that diversification, buying various types of investments/securities in order to spread the risk among a number of investments is a good investment strategy.  Before you can decide where to invest you have to understand your options and become familiar with many financial terms, phrases and formulas.

When you invest in securities (stocks, bonds, mutual funds, index funds, exchange traded funds, CD’s and US treasuries) you usually invest through Stock Markets & Securities Exchanges.  Although most of us have heard of the largest one, The New York Stock Exchange (NYSE), there are actually numerous ones including foreign exchanges such as the Tokyo Stock Exchange.

But to understand investing in a company you need to understand how a company goes public so you can invest in it on a stock & securities market.  The process of creating a stock is called an Initial Public Offering (IPO) ; When you buy a stock, you become part owner of a company.  Even though most of us hear the word stock, and think there is just one kind of stock, there are actually two different stock classifications: Common, the most widely held, and Preferred (Stock Types Common & Preferred) and you need to know difference between the two.  There are basically only two ways to make money from stocks.

1. Selecting stocks that will increase in value (Stocks: Buying, Selling & Researching ), where you sell the stock for more than you purchased

2. Selecting stocks that have a history of paying excellent dividends, a distribution of earning to shareholders (
Stock Dividends & Dividend Re-Investment Plan (DRIPs) .

In looking at companies, investors & analysts like to classify/sort various companies together to gage the market.  One way is by the total value of a company’s outstanding shares, which is called Market Capitalization.  Companies go from large cap (over $5 billion) to micro-cap (those under $250 million).  Another way to classify/sort companies is to put a label on them (Stock Labels Mostly Unofficial Stock Classifications), such as Blue Chip, Growth Stock or Penny Stocks.  These labels are unofficial, often without precise definitions, and stock can carry more than one of these labels.  Never-the-less these labels are used frequently by analysts, the press and investors.

It is also important to judge/measure "how the market" is doing. Is it going up, declining, and by how much?  Indexes are the most widely used measures of the market, although different investors use different indexes.  Indexes, are a group of stock selected according to a certain criterion to represent a specific market, industry or asset class.  The Dow Jones Industrial Average, is the most commonly referred to as a measure.  Even though The Dow only measures the top 30 largest companies, those 30 companies actually make up 20-25% of the total U.S. market value.  Other investors rely on a broader picture, such as the Russell 3000, which measures the performance of 3,000 companies, which represents over 98% of the U.S. market value.  When you decide to purchase securities through a stock broker or online account (Stock Brokers & Brokerage Accounts) you need to provide instructions on how to execute/carry out your order (Trading Stocks & Types Of Orders.  This varies from the most common type "market order" (buy or sell at whatever the current price), to sophisticated trades involving the price of the stock and/or time in which to carry out the order.  Also realize that no matter how you purchase securities there are fees involved and you need to know what they are and calculate them into the cost of your investments.

Smart investors research companies, mutual fund firms, and investment firms before they invest.  Not only do they need to understand the company and its future prospects, but also its industry, competitors, and how the company measures up to its competition ( Stocks: Buying, Selling & Researching ) and its performance against the markets in general (Indexes).  But companies do not operate in a bubble.  Therefore you need to look at things from employment, and consumer confidence, to interest rates. These are generally classified as Leading Economic Indicators, although there are some additional important things such as politics and trends that can also impact the performance of a stock (Economic Indicators & Other Causes That Can Affect Stock Prices Other Than Company News).  Eventually you will start to learn the relationship of these indicators to your company.  For example, if people are employed and they are confident about their future, they will spend more money.  This might mean people will spend more on toys and other consumer products which will increase the shares of not only the products, such as toys, but also the retailers who sell those products.  Or if a winter is particularly severe, it could mean a high demand for heating oil and gas, which could increase the profits and sales of those energy suppliers.

The two major types of investments are: Stocks (Stock Types Common & Preferred) and Bonds.   Stocks we touched on above. Bonds are IOUs where you are lending money to a corporation or governments and their agencies, which are used to finance a project or put the money to work.  There are various types of companies and governments that issue bonds. Some bonds are at a greater risk of defaulting, not paying the promised issue.  So you can determine the risk/reward benefits.  Bonds are rated on the issuer’s likeliness to be able to repay the amount in the promised period of time.

When investing in stocks and bonds many investors do not have time or the desire to do the research themselves.  They might also prefer to invest in a group of stocks vs. a single stock. In this way they are not putting "all their money in one basket".  For this reason many people invest in Mutual Funds Mutual Funds are operated by an investment company that raises funds from shareholders to invest in stocks and bonds or other investments.  When you purchase a mutual fund it is like owning a small share of all the companies owned by the Mutual Fund.  There are thousands of mutual funds to choose from.  Fund strategies vary from ones that invest in a single segment, such as technology, to other funds whose approach might be broader such as a Municipal Bond Fund.

Other investors believe they cannot consistently "beat" the stock market, and they would be happy if they could just match the market’s performance.  These investors put their money into Index Funds (Index Funds).  These funds own a portfolio of stock and bonds that matches or mirrors a broad based index (Indexes , such as the S&P 500, or the Dow Jones Industrial Index .  An Exchange Traded Fund, (Exchange Traded Funds (ETF) are actually mutual funds, that trade like stocks yet follow an index (Indexes).  Both index funds and exchange traded funds are types of mutual funds.

When you make an investment you need to know that there are costs generally involved from commissions for trading or using a financial advisor, to management fees from mutual funds.   Before you invest make sure you are aware of all the fees.

Under our Savings section (
Saving ), always remember that part of a good investment strategy is to always have put aside cash or cash equivalents in case of emergencies.  This can be money invested in Savings Accounts (Types Of Savings Accounts); Certificate Of Deposit (CD)Money Market Deposit Account (MMDA) Also Called Money Market Account ; Certificate Of Deposit (CD); and U.S. Treasuries (U.S. Treasury Offerings ).

As I told you up front, I am not going to suggest any specific investment strategy.  However, you might gain some investing insights from a few of these most famous and successful investors:

"The individual investor should act consistently as an investor and not as a speculator.   This means, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him, and that he is getting more than his money’s worth for his purchase."

Benjamin Graham

"I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies."

"You get recessions, you have stock market declines.  If you don’t understand that’s going to happen, then you’re not ready, and you won’t do well in the markets.

"Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it."
Peter Lynch

"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.  The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."
Sir John Templeton

The financial markets generally are unpredictable.  So that one has to have different scenarios.. The idea that you can actually predict what's going to happen contradicts my way of looking at the mark"
George Soros

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."
Warren Buffett