Make a Bad Economy Work for You
You're not too young to start investing your student money.
By Stephen Borkowski
When Todd Romer was 16 years old he bought 10 shares of Johnson & Johnson stock with money he earned mowing lawns. “That was a tremendous lesson,” he says. Now he’s the editor of Young Money magazine, a publication he founded in 1999.
Becoming an Investor
Investing while you’re a high school or college student isn’t as outrageous an idea as you might think. “People think to become an investor you have to be 40 years old, and have hundreds of thousands of dollars,” Romer says. He started with $430, but you could start with even less than that.
And you don’t need an advanced business degree to learn good investing skills. “When you break it down, they’re very simple concepts to understand,” Dayana Yochim, senior writer for The Motley Fool, says. There are an array of books and Web sites you can use to educate yourself (check out the list at the bottom of this article).
“When you’re young, living under your parents’ roof, and don’t have bills to pay, that’s a great time to start socking money away,” Yochim says.
Plus, time is on your side. A principle known as compounding increases the power of your money as it earns interest over time. For example, if in one year you earn 10 percent interest on an investment of $100, you’ll make $10. Now, with $110 invested, still earning 10 percent, you’ll earn $11 in the second year. So after two years, without adding another penny, you’ve made $21. (Experiment with this compounding calculator to see how long it would take to double that $100.)
When you invest, “you become an active student in the stock market,” Romer says. “You become more astute about business,” as you study your investment and figure out why the market is fluctuating.
Where to Start
The stock market is a good place for young people to start because it’s accessible and offers the potential for strong returns. “You can’t buy much real estate for $500,” Romer says. And the low interest rates on most bank accounts don’t generate much growth.
Web sites like Sharebuilder.com let investors purchase stock with no minimum account balance. You could start with $20. To find companies “open your closet. What are the products that you use? What are the stores you like to shop at?” Yochim asks. Then go online and find out if it’s publicly traded.
There are other ways to invest in stocks. Dividend Reinvestment Plans (DRIPS) allow you to buy a single share of stock. As that share earns dividends, those dividends are used to buy additional shares. There are index mutual funds, in which you own a little bit of every stock traded on a particular index. There are also traditional mutual funds, made up of an array of stocks across many industries.
As part of your research, you might try “fake” investing to get comfortable tracking and researching stocks. Monitor the performance of stocks that interest you by setting up a free portfolio at Financials.com. Or play Fantasy Stock Market on the Young Money Web site. It’s free, and you’ll get $10,000 worth of pretend money to invest.
Are You Ready?
Before you invest a cent, look at your finances and determine if you can afford it.
First, “if you are carrying debt that’s high interest, credit card debt, pay it off,” Yochim says. If your credit company charges you 14 percent interest on your balance, and you can earn 10 percent on your investment, paying off that balance is a better use of your money.
Second, if you’ve got a short term financial goal, then a low-risk savings account might serve you better. If you’ll need this money soon to buy text books or a car, then you’ll want to have access to those funds and won’t want to risk diminishing them. You should be in a position to part with the money you plan to invest for at least five years.
Finally, check your attitude. If you expect to turn your investment into millions within a year, you’re setting yourself up for disappointment. “The stock market is very kind to patient investors,” Yochim says. “The market is on an upward swing over the long term. In the short term, it’s extremely volatile.”
The stock market is not the place to try and make a quick buck. “It’s a place to acquire wealth over time based on historical averages, and the compounding effect,” Romer says.
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