The Birds and the Bees of Stocks and CDs: 4 Investing Lessons for Teens

Good money habits are essential life skills. But when we teach kids about money, we often focus on things like saving and budgeting. “Divide your allowance into saving, spending, and charity. Don’t borrow money you can’t pay back in a reasonable time frame. Keep some cash on hand for unexpected emergencies such as a lost phone or even the upcoming release of a must-have video game.”

These are all valuable lessons for kids, but notice what’s missing? Investing lessons. As the young ones get into their tweens and teens, it’s important to add investing to the financial lesson list.

Although we might not think about investing for teens as a necessity, it can be important to help them learn the value of compounding returns so they can start working on building wealth over time. When you learn how to invest as a teenager, even small amounts can add up to a significant nest egg down the road (see figure 1). 

Investing for Teens: The Basics

Helping your teenager learn about investing can be one of the best lessons you teach. Start with the basics.

When I first began teaching my own teenager about investing, we started with how stock investing allows you to own a portion of a company and then potentially benefit from its success. At first, my son was skeptical, thinking that small amounts of money don’t matter much. However, with the help of an online calculator to illustrate returns, it’s possible to show how consistency adds up over time.

In fact, I showed how different his future wealth could be if he started investing now, even with only $50 per month, compared to waiting another 10 years to start. We also played around with different monthly investment amounts and time frames to figure out different ways he could become a millionaire.

Next, I showed him the returns on cash and bonds. Although I emphasized that these assets are geared toward a long-term plan, it really helped him see the importance of investing. Once you provide a hands-on way for your teen to understand the nature of investing, you can take your money lessons to the next level.

Michael Kealy, AAMS, an education coach at TD Ameritrade, suggested that demonstrating compounding returns (as in figure 1) can be a good way to spark interest in teens.

“I definitely saw a light turn on with my oldest daughter when she saw the tables,” he said. “She was able to see the value of delayed gratification and understand how investing could be a path to wealth later.”

Choosing the Best Investments for Teenagers

When you’re identifying stocks for teens, realize that the best investments for teenagers may be familiar names that spark interest. Open a custodial account so your teen has investments in their own name. Although you’re ultimately responsible for a custodial account, you can still let your teenager be involved. Then, explore some symbols that kids can relate to—it can be a huge help.

“Consider looking at recognizable companies like Apple (AAPL) and Netflix (NFLX), names they know,” Kealy suggested. “You can really dig into how these companies are performing and where they make their money.”

Kealy also recommended using the paperMoney® stock market simulator on the thinkorswim® platform from TD Ameritrade. The platform can help you identify an individual company and look at how it makes money from different product lines.

Stock trading for teens is about letting them try new things and make a few mistakes—early in life, while they have plenty of time to recover from poor decisions. Plus, if they start out with a paperMoney account, teens can get their feet wet without risking a dime of real money. 

Let your teen pick a stock. Add it to your child’s portfolio, and then discuss how to analyze its performance. Help your teen track the investment and learn how the stock market fluctuates.

Of course, letting your teenager choose a few stocks doesn’t absolve you of making good choices as the custodian. Most of my son’s custodial account is actually invested in an S&P 500 Index exchange-traded fund (ETF). He’s learning not only to identify individual stocks that might be a good fit for his portfolio, but also how to compare the performance of an individual stock against a wider swath of the market. So far, the index ETF has performed better, and that’s been a good lesson as well.

Finally, I’ve talked to my son about the strategy I use when managing his 529 college savings account. This helps him gain insight into different portfolio approaches and develop an investing style that works for him. I’ve pointed out some of my own poor results, and we review what could have gone better.

More Tips for Teaching Teens About Money

Look for hands-on opportunities. Anytime a teenager can learn by doing, it improves the chances the lesson will stick. Help teens be involved by letting them choose a stock and encouraging them to follow its performance.

“I’ve set my kids up with Coverdell ESAs and, even though they’re limited in terms of how much you can contribute, they’re good for letting your kids make choices,” Kealy said. “I enable them to make choices about what’s in there and offer guidance.” (Note that Coverdell ESAs also have income eligibility phaseouts.)

Let them make mistakes. Not too long ago, my son decided to try his hand at crypto trading. He didn’t have enough to buy a whole Bitcoin, but he wanted to take $50 and see if he could trade smaller (and even more volatile) cryptocurrencies and harvest some gains. It didn’t go well. After two wild and crazy days, he was down $16 and ready to cut his losses. Learning about some of the pitfalls of trading early on means that he won’t have to learn a more expensive—and potentially devastating—lesson later.

Talk about the results. It’s not just about letting your teen make mistakes. You also need to talk about investing results. My son and I talked about how there are people who do quite well with the strategy he attempted, but it didn’t work for him. Or perhaps his emotional risk tolerance wasn’t high enough to keep pursuing it to success.

We had a good talk about priorities—about deciding what you can afford to lose and managing your money according to your values. Being able to talk about what’s going on with successes and failures can help your teen stay on track.

Kealy also makes it a point to talk to his kids about the results of their investing choices.

“Show them their account balances—kids love that,” Kealy said. “But if they notice it’s down, talk about why the portfolio might be struggling, or why a company is down. Talk about how it might not be time to sell, and how the market works during a recovery.”

Talk about your own investing exploits. Share your own experiences as well. When you think about how to teach kids about money, you may not immediately plan to share your own mistakes. But I’ve been up-front with my son about my blunders, and that helps him know that it’s okay to make mistakes sometimes—as long as you learn from them and improve.

Finally, I make sure to talk about the importance of sticking to your investing plan and not making decisions based on panic. My son hasn’t really been through a major market crash or recession (he was in elementary school during the Great Recession), but I’m already priming him to avoid panicking when the next crash comes.

Bottom Line

Investing for teens is really about giving them a chance to get a head start on building long-term wealth. When you provide teens with a way to be involved and practice good habits, you set them up for financial success.