by Daniel Marshak, Opinions Columnist
graphic by Emily Cheng
What is investing? A common question among teenagers, especially following the GameStop saga, is a good question to be asking yourself. While investing sounds confusing, it’s simpler than you think. Finance professionals often use complicated words to scare the public, but anyone can learn how to invest.
First of all, let’s clear up some common misconceptions. You do not need to be 18 or older to start investing in the stock market. In fact, there is no minimum age of investing as long your parents are on board. The stock market isn’t gambling, and an abundance of money is not necessary to begin investing.
So, how can you secure your financial freedom? First, you need to ask yourself a few questions. Do I understand the stock market and the risk associated with participating in it? Do I understand the stock market is not a casino table, nor is it a “get-rich” scheme? These questions are crucial to understand before you begin investing.
You’ll also need to make a custodial brokerage account; simply your own brokerage account — an account where you can trade securities — just like the ones your parents have, but with your own money. While you will need permission from your parents to actually open an account, any and all transactions will be your own. Also, keep in mind that all selling of stocks is subject to taxes.
Beyond simple mechanics, two things should be cleared up: why and what should you invest in? Think back to freshman year math, when your teacher was grilling you with the compound interest formula. The average percent return or gain in value in the S&P (Standard & Poor’s) 500, a combination of the 500 largest companies in America, is around 10%. It is possible for years of negative return, but in the long term, it will increase. Buying a piece of the S&P 500 is the same as buying a piece of the American economy; as the United States economy grows, so will the S&P 500 and the size of your investment.
Although some may advise you to choose individual stocks to invest in, this approach is a higher risk to take, especially for a beginner. Let’s say we put $20 a month into an index fund such as the S&P 500 at a 10% annual return for 50 years. You will make $279,338.05, and if we jump this to an 11% annual return, your profit will increase to around $400,000. If you stay longer in the stock market and make larger monthly contributions, your returns will multiply. That’s not to say there aren’t risks associated with the stock market; take the 2008 recession or the past year when the pandemic sent major indexes crashing. But even with the unexpected pandemic, you still would have yielded yourself around 30% return up to today.
Above all, remember that buying a piece of America, no matter the date, will still return you a fair amount if you believe in the growth of the U.S. economy. As long as you don’t panic sell, you are bound to profit in the long term as the American economy gets stronger.
