Congratulations! By looking up this question you are likely way ahead of people your age in planning for retirement and investing. Most people are woefully unprepared to retire and never learn the basics of investing.
First, how old are you?
In general, you have to be 18 to start your own investment account. Your investment account is called a brokerage, this is the company that handles or hosts your investments. If you are under 18, don’t worry because you can still get involved in investing. People under 18 can have custodial accounts that are managed by their parents. You can also get a job in most states when you are younger than 18 and begin saving! Saving is the key to good investing habits.
The hardest part of investing is doing it.
Many people are afraid to invest, they either view it as too risky or something only rich people can do. The good news is, neither of these are true! Investing does involve some risk, but the risk can be minimized with good investing habits.
Learn why you should invest.
It may be hard to stay on track if you don’t know why you are investing. Investing is not just about making money! Investing is about making money AND making sure your money stays valuable. Over time, the value of your money actually decreases! You may have heard your parents or grandparents talk about buying soda for a nickel, whereas now a Coke costs $3, that is inflation.
The inflation rate in the US is about 2% a year. So $100 this year is worth only $98 the next in terms of what you can buy with it. The stock market, on the other hand, returns about 7% a year (adjusted for inflation).
For example, if you save a $100 bill for retirement at age 18, that $100 bill would only be worth $44.57 by the time you are 58. Your money has lost over half its value. If you put that same 100 dollars in a wide range of stocks at age 18, when you turn 58 it would be $1,497.45! You can read more about inflation here.
If you have money in the stock market that grows 7% a year, that interest is compounding. Compounding interest means that not only do you gain interest each year, but the interest gains interest. Again, imagine you invest $100. At the end of year one you would have $107, but at the end of year two you would have $114.49! That is because the $107 you had at the end of year one grows 7% the next year. You can read more about compounding interest here.
How to feel safe investing.
No investment is guaranteed to make money. (Don’t listen to anyone who tells you otherwise.) But, on average the stock market does increase. As mentioned in the last section, the average return on the stock market is about 7% a year. This does not mean that if you put your money in stocks you will make 7% a year, only that if your money is in stocks over MANY years you will likely have returns of 7% a year.
The stock market may gain 20% in a single year or lose 50% in another and there is no way of knowing precisely when that will happen. That is why it is so important to think of investing as a long term decision. You don’t want to put $100 in the stock market, and then freak out when it drops to $60 and sell it. This is called panic selling. If you panic sell at $60, you now have $40 less than when you started. However, if you left the $60 in the market and waited until it recovered, you could have over $100 the next year.
Next, deciding what brokerage to invest with.
These days there are many great brokerages to choose from. I would recommend E-Trade, Acorns, TD Ameritrade, or Charles Schwab. Robinhood can be great too, but be aware that most Robinhood users prefer riskier day trading. Look for companies with 0 commission trading. This means they don’t charge for most transactions. Whatever you pick, make sure it is a company you will stick with for several years, you can move money from brokerage to brokerage but it is a pain.
What stock should you buy?
When you imagine investing, you probably imagine buying a single stock in a company like Google, Tesla, or Amazon. Buying one stock makes you a partial owner of that company! If the stock price goes up, your value increases, and if the stock price goes down, your value decreases. Some people have made lots of money buying individual stocks. Imagine having bought Amazon in 2008 at $50 a share, today that would be worth over $3,000 in 2020, 6 times what it was in 2005! Amazon is an outlier however, and the majority of stocks will not give those kinds on monumental returns unless you are very, very lucky.
Instead of buying one single stock, you can invest in index funds. Index funds are like buying one stock that contains dozens, hundreds, or even thousands of companies. This is a great way to minimize risk with diversification. Imagine you buy an index fund that has 100 stocks and you own 1% of each stock in the fund. Even if one stock goes to 0, while the other stay the same you will still have 99% your original value. Now imagine one stock goes to 0 and another increases 6 times in a single year, you would now have 105% of your original value.
Talk with friends and family.
Getting you friends interested in investing is a great way to stay motivated. You can push each other to learn more, save more, and invest more. It is also a good idea to get feedback if a move is too risky. If none of your friends invest, start a club at your high school or college! You can also find many online forms for young people who invest. (Please stay away from r/Wallstreetbets I am begging you.)
Family members can be great assets. You probably have at least one member of your family who has some money invested. Ask them for pointers, they probably have a lot of experience with stock market ups and downs. Plus, family members are more likely to give you money for birthdays and christmases if they trust you know what to do with it ;).
Investopedia has great resources for learning. Your first step should be to learn about risk, diversification, compounding interest, and dividends.
What age did you become interested in investing? Share what got you started in the comments!