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Investing 101

Investing 101

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Updated on May 23, 2008

Sure, your teen may not be able to keep track of where he spends his allowance and when his next paycheck is coming. But even the most cash clueless teens can benefit from learning about investment! A solid financial education isn't just about making money: it can teach responsibility, careful analysis, planning, and more, and gets your teen thinking about the economic forces that make money flow and ebb.

There are many ways to invest money. The most common ways are in a savings bank where your money will earn interest, and in bonds, stocks, and mutual funds. So how do bonds, stocks, and mutual funds work, anyway?

Bonds
Bonds are loans to companies or governments. The company or government promises to pay you back by a certain date and also gives you interest on your money - your loan. Many people give these bonds, usually government savings bonds, as gifts to newborn babies or as birthday presents to kids. By buying the bonds, they feel they are lending money to help the country grow, and the bond appreciates - is worth more - as the child grows up. The dollar amount that is paid for the bond is called the principal. The amount of interest that the bonds pays is usually determined by the strength of the government or company to pay back the principal plus the interest rate promised. United States government and savings bonds are considered very safe, but bonds from newly formed companies or troubled countries may be considered much more risky.

Stock
A stock is a small piece, or share, of a company. People who own stocks are shareholders. If you buy stock and the price is higher than when you bought it, you make money, and it could be a lot. But if the price of the stock is lower than when you bought it, you will lose money if you sell it. Stock prices go up and down all the time.

People who buy shares of a company do so for two reasons: dividends and value.

Dividends - As the company makes money, some of that money is paid out in dividends. Dividends are earnings based on the percentage of each share that you own. The more shares you own, the more money you make.

Value - When a company grows, the value of the stock increases. The more valuable the company becomes, the higher the stock price goes.

Mutual funds are lots of different stocks or bonds grouped together. When you buy shares in a mutual fund, you and many others own a very small part of the whole fund collection. A fund manager decides which stocks, bonds, and other investments to buy with the money collected from investors. By investing in a mutual fund, you can own stocks in several different industries - technology, medicine, international companies, or companies that protect the environment.

Six Things to Know
If you're thinking of investing money for your child:

  1. You will have to make the investment on behalf of your child. In order to buy stock, you must be at least 18 years old.
  2. Your goal as an investor is to build an increasingly large and profitable portfolio, a collection of investments.
  3. There are all kinds of investments with all kinds of risks. Some investments may be very high-risk. That means that you may make a lot of money, but you may also lose a lot of money. There are also investments that are considered low-risk, and almost no-risk. How you invest your money depends on your personality, your appetite for adventure, and what is happening in your life.
  4. Ask questions about the investment you're considering: What if I end up with less money than I started with? How soon can I get my money if I need it? How can I find out more about the particular investment?
  5. Know the risks involved and try to match your personality to the right level of investment risk. If you like life in the fast lane, and you can afford to lost the money, go for it. But if you worry about losing your money, do something more conservative. Of course, less risk may mean less profit on your money.
  6. Don't put all your eggs in one basket. That means, try to diversify; put your money in several different kinds of investments, not just one. That way, if you take a loss on something, chances are you'll make a profit on something else.
 
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