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A Teens Guide to Investing (for beginners)

Investing might seem like something only adults need to worry about, but starting early can make a huge difference in your financial future. If you're a teen wondering how to make your money grow, this guide is for you. We’ll walk you through the basics of investing, explain why it’s important to start now, and give you practical tips to get started.

Why Should Teens Start Investing Early?

1. The Power of Compound Interest

Time is your greatest ally when it comes to investing. The earlier you start, the more you can take advantage of the market’s ups and downs to grow your wealth. That’s what compound interest does for your money. When you invest, you earn interest not just on your initial amount but also on the interest that builds up over time. The sooner you start, the more time your money has to grow.

2. Future Financial Security

Investing early helps you build a solid financial foundation. By the time you’re an adult, you could have a substantial amount saved up, giving you more freedom and security. Whether you want to travel, start a business, or buy a home, having investments can make your dreams more attainable.

3. Developing Good Habits

Starting to invest as a teen helps you develop smart financial habits early on. You’ll learn the importance of saving, being patient, and thinking long-term. These habits will benefit you in many aspects of your life, not just your finances.

Understanding the Basics of Investing

There's a popular saying that to eat an elephant, you need to take it one bite at a time. The same goes for investing. It can seem overwhelming, but breaking it down into simple steps makes it manageable.

So, what exactly is investing? At its core, investing is putting your money into something with the expectation that it will grow over time. Let’s explore the basics of investing:

What Should Teens Invest in?

Let's take a closer look at the nine common types of investments:

1. Stocks

Investing in stocks means owning a small part of a company. The value of your shares can go up or down based on the company's performance. Stocks can offer high returns but come with significant risk due to market fluctuations.

2. Bonds

Bonds are loans you give to companies or the government. In return, you earn interest over a set period. Bonds are less risky than stocks but typically offer lower returns.

3. Mutual Funds

Mutual funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other assets. A fund manager handles the investments, offering diversification without needing to pick individual assets.

4. Exchange-Traded Funds (ETFs)

ETFs are traded on stock exchanges and usually track a market index, industry, or commodity. They provide diversification and are cost-effective, similar to mutual funds but with more trading flexibility.

5. Savings Accounts

Savings accounts are low-risk investments offered by banks. They pay a small amount of interest on your deposits and provide easy access to your money, though returns are lower compared to other investments.

6. Treasury Bills

Treasury bills (T-bills) are short-term loans to the government, considered very safe with low risk. They offer predictable returns over a few weeks to a year and are backed by the government.

7. Certificates of Deposit (CDs)

CDs offer fixed interest rates and terms, providing stable and predictable returns. They usually have penalties for early withdrawal, so choose a term that fits your financial goals.

8. Real Estate

Real estate can appreciate in value and generate rental income. It helps diversify your portfolio but requires research, property management, and is less liquid than other investments.

9. Cryptocurrency

Cryptocurrencies are volatile and based on blockchain technology. They offer high potential returns but come with significant risks and regulatory uncertainties. 

Factors to consider before investing

Let's look at the factors you need to consider before investing. Understanding them will help you navigate the investment world more confidently.

  • Risk Appetite

Just like your appetite determines how much food you want to eat, in the same way, your risk appetite tells you how much risk you’re willing to take. Some people have a high-risk appetite, and others have a low-risk appetite. Assess how comfortable you are with potential losses and choose investments that match your risk appetite.

  • Diversification

Diversification is simply not putting all your eggs in one basket. By spreading your investments across different types of assets (stocks, bonds, and real estate), you reduce the risk of losing all your money if one investment performs poorly. 

  • Return on Investment (ROI)

In investing, RIO is about understanding how much your money grows over time. Higher ROI usually comes with higher risk, so finding the right balance is key.

  • Investment Fees

Some investments have fees, and these can eat into your profits. It's important to understand the fees associated with an investment and choose ones with reasonable costs.

  • Your Financial Goals:

Before you start investing, it’s important to know what you’re investing for. Setting clear financial goals will help you stay focused and motivated. If your financial goal is far off (like retirement), you have more time to invest. If you need the money soon (like for college next year), you might choose more stable, short-term investments. Understanding your goals helps you tailor your investments to achieve them.

How Old Do You Have to Be to Start Investing?

You can invest as a teen if you’re informed and have your parents/guardians backing. Let's break this down into little bits to help you figure out when and how to start investing. 

  • Parental Consent: If you're younger than 18, you might need your parents to help set up an investment account. They can guide you until you're old enough to manage it yourself.

  • Learn the Ropes: Start learning about investing early, even if you're not putting in big money. Understanding how investments work will help you make wise investment decisions when you want to invest your money.

  • Know the Risks: Make sure you're aware that investments can go up or down. It's not all gains; sometimes you'll face losses. Knowing this helps you stay smart with your choices and diversify your investments.

How Much Money Do You Need to Start Investing?

A common misconception people have about investing is; “I cannot invest until I have a lot of money.” But that couldn’t be farther from the truth. Here are some tips to help you get started today:

  • Start Small: Nowadays, you can start investing with as little as N5,000 on platforms like Trove. We are also working on an investment feature that allows teens to invest with ease. So, watch this space. 

  • Save and Invest: You can start by saving a small portion of your allowance or earnings regularly. With the Earlybean app, you can create a savings goal and track your progress towards achieving that goal. Then you can put that money to work by investing it. The important thing is to start. As you grow older and earn more, you can put more into your investments. 

Starting to invest as a teen is one of the smartest moves you can make for your future. Remember, investing is a journey that takes time and patience, but the rewards are well worth it. Keep learning, stay patient, and watch your money grow. You've got this!