Investing vs. Trading
There is a difference between investing and stock trading. Stock trading focuses on short-term growth; whereas investing is a long-term strategy. Investments are typically held over a period of years, even decades and are built to ride out the many ups and downs of the market. Trading is a much more frequent buying and selling of stocks and commodities, for example, attempting to capitalize on the constant turns of the market. For instance, day-traders buy and sell every day, hoping to capture gains.
What Kind of Account Do I Need?
When deciding on an account type, you must consider the earned income question. Does your child have earned income? If they are older and have a job, they would fall into the category of having earned income.
If your child DOES NOT have taxable income or wages, you can open a custodial brokerage account under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act. The account will be in the parent name until the minor comes of age, either 18 or 21 depending on your state.
If your child DOES have earned income, you can help them open a custodial IRA, such as a Roth IRA. Contributions to Roth IRAs grow tax free and can be used at any time for education, a first home purchase, etc.
How Much Can Your Child Earn?
Roth IRAs are great for income earners and starting one at age 16 and contributing a mere $200 per month for five years could net your child almost half a million dollars by age 70, depending on interest rates.
This should fire up your teen for investing!
Check out our Roth IRA Investment scenario and open that account today!
What Is Your Tolerance to Risk?
Before investing, it is important to understand how you tolerate the risks involved. Are you more conservative or more aggressive? It depends on many factors, including how long you plan on keeping your money invested and how much a loss could affect your daily living abilities.
Your risk tolerance may change depending on your current financial situation or even the state of the world. It is important to routinely assess your risk tolerance, especially the closer you get to retirement.
Take our Risk Tolerance Survey and see what your tolerance is right now. If you’re not sure how to answer, ask a parent!
