Investing is a crucial part of building wealth. You can take your savings and invest it so your money will grow over time. Investing is passive, and it’s easy to start investing. Unfortunately, many people don’t start investing until they’re well into adulthood. But the earlier you learn how to and start investing, the sooner you’ll benefit from it!

Although it may not sound fun, investing is a crucial skill, and learning it while you’re young will allow you to become wealthy and retire much sooner than those who don’t. 

And once you start seeing your money grow — if you’re doing it right — it will be very motivating, making investing much more interesting. But how do you start investing, and is it possible to invest as a teenager? And what can you actually invest in? 

Diversification

Before I get into how to invest in different assets, I want to emphasize how important it is to diversify your investment portfolio. 

“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences,” Troy Segal, Investopedia. 

When you invest, it’s important to diversify in two different ways:

1. First, you should diversify within every asset class you invest in. For example, if you invest in stocks, you shouldn’t just invest in a few companies; you should diversify among 20-30 stocks at least.
2. Second, you should diversify into multiple asset classes. This means you shouldn’t just invest in stocks; you should also consider investing in real estate and other assets. This can be really important during volatile times. For example, during the housing crash, if all of your money was invested in real estate, you would have lost a lot of money. Another example is when COVID hit, and stocks tanked 30% in a matter of weeks while housing prices soared. You never know what’s going to happen or how different asset classes will be affected. 

Stocks

Stocks are the most common investment and what most people picture when they hear the word “investing.” The stock market can sound intimidating, but it really isn’t that complicated once you understand the basics. I won’t go in-depth about how the stock market works in this article, but I do have other articles explaining that.

But how do you invest in the stock market? Well, for legal adults, it’s easy. You can open up a brokerage account with your bank, fund it, and start investing. 

But although many people associate the stock market with old people, you can start investing in stocks even as a teenager. To invest in stocks as a teenager, you’ll need help from your parents to open what’s called a custodial investment account. 

“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities,” Troy Segal, Investopedia. 

So although you won’t be able to invest as if you were an adult, you can still buy and sell stocks with permission from your parents. Opening a custodial account is a great way to learn and get hands-on experience with investing from a young age. 

Brokerages

When you’re investing in the stock market, it’s crucial to choose a good brokerage to use to invest. You see, every brokerage has its unique benefits and shortcomings. Understanding which brokerage is right for you will make investing much easier and will help you have the best investing experience. In this article, I won’t go into the best investment accounts, but I have an article about what the best custodial accounts are and their unique features based on my research and personal experiences investing as a teenager. 

So now that you understand how to invest and why it’s important, what should you actually invest in? Well, there are many different investment strategies that you can choose between depending on your goals. Check out this article to learn more about what to invest in! 

Index funds

Index funds are a great way to invest in the stock market. 

“An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500)” Jason Fernando, Investopedia. 

Index funds trade just like a regular stock; you can buy shares and sell shares when the market is open, and the price fluctuates over time depending on supply and demand. 

Investing in index funds allows you to broadly diversify to the point that you’re not investing in individual stocks but rather the stock market as a whole. When you invest in index funds, you’re betting that the entire US stock market will do well, which is a pretty safe bet. 

Index funds inherently produce average returns, which may or may not be a good thing, depending on your goals. If you want to consistently get about 9% yearly returns, investing in index funds is a great option! But if you want to make higher returns than that, you’ll have to invest in individual stocks.

Individual stocks

Investing in individual stocks is higher risk, higher reward. While you do have the possibility of making significant returns by investing in just a few companies you believe in, some of your stocks may lose value, which will significantly impact the value of your whole portfolio. 

As you invest in more companies, the risk of your portfolio goes down, as well as its potential returns. You may want to consider investing in both individual companies as well as index funds. This way, you will have a diversified portfolio while still having the potential benefit of investing in individual companies. 

Cryptocurrency 

The next asset class is cryptocurrency. Cryptocurrencies are a lot more complicated than stocks, and investing in them is harder, especially if you are a teenager. But before we get into the details of how to invest in crypto, here’s some background information about how it works. 

 “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation” – Investopedia. 

This is just a brief overview of how cryptocurrencies work, but each cryptocurrency is unique, and before investing in them, you should definitely do a lot more research to fully understand how they work. 

You probably won’t be able to buy cryptocurrency through most traditional brokerages, and if you are, there will likely be high fees associated. Luckily there are a few alternative options.

A cryptocurrency exchange is, you guessed it, a place to buy and sell cryptocurrency. Even though there’s no law against it, most crypto exchanges don’t allow minors (people under the age of 18) to buy cryptocurrency. 

“Yes, you can buy bitcoin if you are under 18 years old. However, they don’t make it easy. Most exchanges nowadays make it so that you have to comply to their Know Your Customer (KYC) regulations in order to buy bitcoins on their platform. They do this to comply with governmental regulations themselves. … Allowing underagers to purchase bitcoin on their platform is a risk that most exchanges are not willing to take because it falls into a grey area,” Michael Harrington, cryptoguidepro.com. 

They specificly say Bitcoin in this example, but this is true for all cryptocurrencies. 

This makes it a lot harder to invest in cryptocurrency as a teenager, but it is definitely still possible. There are many different ways to invest in cryptocurrency, but most of them are convoluted or have extravagant fees associated with them. There are two ways I suggest investing in cryptocurrency as a minor: 

1. Derivative fund

Instead of going through the hassle of investing directly in cryptocurrency, you can invest in a derivative fund. Derivative funds purchase cryptocurrency and serve as the custodian of it. You can invest in these funds on the stock market in a custodial account. Although you aren’t directly investing in cryptocurrency, this still gives you exposure to the asset class. 

2. Transfer

If you’re set on directly owning it, the other method of investing in cryptocurrency requires the help of one of your parents or another adult you know. 

While you can’t use crypto exchanges as a minor, you can still make a digital wallet. Once you’ve created a wallet, you can ask an adult you know to open an account with a crypto brokerage and purchase the cryptocurrency you want. Then, they can transfer that to the digital wallet you created, and you can pay them back in cash.  

To learn more about the pros and cons of these methods, as well as more details on how to execute them, check out this article!

Real estate

Real estate is another common investment and one of the most important ways to build wealth in America. The biggest benefit of investing in real estate is leverage which I won’t dive into in this article, but to learn more about all the benefits of investing in real estate, check out this article!

Although you can’t exactly buy a house as a minor, unless you happen to have a few hundred thousand dollars, you can still invest in real estate. 

REITs

“A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves” – James Chen, Investopedia.  

You can invest in REITs on the stock market, just like a regular stock of a company, for easy, broad exposure to real estate. However, this is a lot less lucrative than actually investing in real estate can be, so when you can afford to invest in real estate, definitely consider that as an option. 

Even just learning about the importance of owning real estate as well as how the process of buying a home works, you’ll be far ahead of most people by the time you live by yourself and have an income. 

For more detailed information about different types of real estate investing, check out this article!