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Better InvestingA most informative and educational book specifically for teens.
— (August 2000)
An investment guide for new investors, including stock market games and investment clubs, interviews with teens who have invested, investing advice, and additional resources.
The book is somewhat elementary, but quite extensive, with explanations of stocks and how they work, how to open a custodial account (teens must have one until they are old enough to hold and trade stocks in their own names), and how to evaluate a stock. There are success stories from adults who grew up around investing, learned as children, and went on to become fund managers or hold other responsible positions in the financial industry. Alexandra Lebenthal, for instance, head of the bond brokerage firm Lebenthal & Co. in New York, is only one example. Others include James J. Cramer, president of Cramer, Berkowitz & Co. and founder of TheStreet.com, who began tracking stocks in second grade.
There are also insights from kids who have already amassed sizeable portfolios, such as Jason Orlovsky, a New Jersey high school senior who began investing with $5,000 he received for his bar mitzvah. Jason turned that $5,000, plus about $5,000 more from savings, into a portfolio worth about $342,000 at press time. He has moved about $80,000 of the money into more conservative mutual funds in anticipation of college tuition bills, and bought himself a used Ford Explorer; stories like this are almost guaranteed to get teens' attention, along with tips on how the reader, too, can turn babysitting or lawnmowing money into a nest egg by the time college rolls around (well, maybenot quite that soon in every case).
Other sections of the book explain how to evaluate a stock; the difference between preferred and common stock; understanding P/E ratio; the meaning of risk vs. reward; and how to be a long-term investor. There is also a relatively good explanation of what day traders do, and what the riskier investment strategies are (buying on margin, shorting, options, covered vs. naked, derivatives, etc.) and cautions about when, if ever, to consider using them. There is also a very useful discussion of full-service, discount, and deep-discount brokers that compares the Merrill Lynches to the Charles Schwabs to the e-Trades of the world, and a caveat about brokers' impartiality when their income depends on their client's buying or selling rather than holding a stock for the long term.
Taxes, earned income, and how investing can affect a teen's quest for tuition assistance are also covered, as well as investing with parents for partners and the actual definitions of stock purchase terms (stop order, limit order, market order, etc.).
Later chapters on mutual funds, investing clubs, and trading games are quite exhaustive. Explanations of what mutual funds are and how they work, what sector funds are, and how to determine the risk and costs involved in selecting a particular fund are quite helpful. Investing clubs seem to be a popular school activity these days, as well, from what the text says, and there are plenty of details on how one works and what types of clubs there are. The chapter on trading games points out the difference between using risky strategies to win a game and the dangers of using risky strategies with one's life savings. There is also an extensive section on Internet resources for research and one on the possibility of Wall Street careers.
There are lots of sidebars, tables, little inserts with factoids, and other "kid-centric" gimmicks to make the book more appealing to the young. Adults may find it a bit too elementary, and there are some areas where it could go deeper into explanations without losing either the young adult it's written for or the neophyte investing grownup hoping for basic information, but it's a very thorough, clear introduction to the market for young people, with plenty of examples to keep them reading and lots of useful information to get them started.
"Dollars do better
if they are
EARL RINEY, CLERGYMAN
What's in This for You
WHEN IT COMES TO MAKING MONEY BY INVESTING, time is on your side. Start early.
You probably know something about the stock market. If you watch the news on television, you can't miss the daily reports of what happened on Wall Street. You may have seen business magazines around the house, or your parents may talk about stocks at the dinner table.
You might even have stocks or mutual funds held in custodial accounts for you. A surprising number of kids do. While no regulatory agency tracks the number of custodial accounts, Merrill Lynch commissioned a survey on kids and money and asked the survey firm to estimate the number of kids between the ages of twelve and seventeen who have stocks or mutual funds held for them in custodial accounts. (See "Money Survey," pages 14-15.) An estimated 2.3 million twelve-to-seventeen-year-olds own mutual funds, while approximately 2.5 million own stocks.
What you may not realize is how investing and the stock market will play a vital role in your future, no matter what you choose to do with your life. Whether you want to build a career in business, be a freelance artist, or become an Internet millionaire, knowing about managing your own money will give you freedom and choices in life that you wouldn't otherwise have.
The truth is that you are going to need to know more about investing than your parentsor your grandparents ever had to know. For better or worse, over the past several years there has been a trend toward ordinary people handling their own money rather than depending on an institution to do it for them. "I'm thirty-one now, and I have been investing since the middle of high school," says Todd Romer, publisher of Young Money, a financial magazine for teens. "I was always amazed that all my peers weren't doing this. Individuals have to take the bull by the horns—take responsibility and get control of their money."
In the old days, it was standard for people to work for a single company for most of their careers and retire to collect a guaranteed pension. That's still the model for some people, but it's far more likely that over the course of your life, you'll change jobs several times—and perhaps even change careers. Not many employers offer a pension with guaranteed benefits these days; instead they have retirement plans that both employer and employee may contribute to. In fact, one of the early decisions you will have to make when you finish your education and start working full time is how you want your 401(k) money invested. (A 401l(k) is a retirement savings plan that workers, and often their employers, contribute to. A worker decides among the choices offered by the employer's plan how that money should be invested.) That's just one reason you'll need to know about investments.
There are other reasons. Even if someday you choose to have a professional money manager handle your affairs the way a teenage movie star does, you need to know what's going on, or you risk being taken advantage of. "I learned about investing not because anyone thought I was going to go into it as a career," says Chris Davis, a mutual funds manager who started learning about investing as a kid. "My father felt strongly that you had to spend some time to learn how to manage your own money. There are a lot of charlatans in the business, but it wasn't difficult to learn what you need to know to recognize if you're being taken advantage of. You need to learn how to make sense of the idiocy that is served up as general financial planning advice by some. Whether you become a doctor or a priest or whatever, learning how to manage your money is an important part of your education."
Studies show that the average teen in America doesn't know a lot about investing. In a survey done by the Jump$tart Coalition for Financial Literacy, a group that promotes financial education, only 14.4 percent of 1,500 high school seniors polled understood that stocks would probably have a higher return than a savings account, a checking account, or a U.S. savings bond over the next eighteen years. (Of course, studies also show that the average adult doesn't know a lot more.)
But just as it has never been so important for teens to know about investing, it has never been so easy to learn and to get started. Commissions and fees on stocks and funds are falling, and a wealth of information is available to the average investor.
One of the mistakes that many kids—as well as adults—make is thinking that the stock market is too complicated and that only professionals can master it. Andrew Hamm, now a student at the University of Michigan, started investing when he was in high school. "I think the biggest misconception kids have is that a normal person can't invest," he says. "You don't have to have a master's in business to have the skills to invest." If you can understand simple mathematics, including addition, subtraction, and percentages, you know enough to learn the basics of investing.
Another pitfall of would-be investors is thinking of investing as being like spinach: good for you, but not something you're dying to try.
Investing is good for you, but it can also be endlessly fascinating. "I do this because it's fun," says Dan Abrahamson, a Connecticut high school student. "When I was ten years old, my big passions were baseball cards and comic books. My grandfather convinced me that I should buy stock in Marvel Comics. I bought it at 20, and it went to 56, split two for one, and then I sold it at 31. It tripled in about a year's time. I was hooked. I started watching CNBC. My grandfather and I would call each other with tips. We'd talk every day." (See Chapter 3, page 50, for an explanation of stock splits.)
Some kids have their interest kindled more slowly "My grandfather used to give me ten shares of stock for Christmas, and I'd think, `You've got to be kidding,'" says Kirsten Hagen, a student at DePauw University in Illinois. "I didn't appreciate it. But I started following the market in high school and did some trading, and when I turned eighteen I took over my portfolio and began to teach myself different ways to research stocks." Hagen was a cofounder of her college investment club, something we'll talk about in Chapter 8.
Investing is exciting. Stock prices change throughout every trading day, in response to world events (a plane crash or a hurricane can affect dozens of stocks: those of the companies involved, their insurance companies, and their suppliers); corporate competition; or even the season. Teens are finding great stock ideas by looking at the products they and their friends are enthusiastic about, and we'll see how they are turning that knowledge into profits for themselves.
Ah, yes: money. Investing is about making money with the money you have. And while the young investors we've talked to have been interested in long-term strategies and haven't cashed in their stocks and left the market, make no mistake: there's no age minimum for making a profit from investing.
Jay Liebowitz, a Californian who started the Web site Wall Street Wizard (see Chapter 10, page 189) and is now a University of Pennsylvania student, started investing at thirteen and quadrupled his money picking stocks like Cisco and Microsoft. Jason Orlovsky is another example. The eighteen-year-old New Jersey high school senior started investing after he received about $5,000 for his bar mitzvah. Over the next five years, he made some uncommonly shrewd investments, most notably as an early investor in a company called CMGI, which owns stakes in Internet companies. His shares in CMGI, which he bought at about $3.50 a share, were worth about $281 a share at the time of this writing. Over the past five years he's pumped about $5,000 of savings into his portfolio, and his investments were recently worth some $342,000. Anticipating college expenses next year, Jason has moved about $80,000 of his portfolio into more conservative mutual funds but is keeping the bulk of the technology stocks that he's done so well with. Although the poised Eagle Scout (his other passions, besides the stock market, include camping and rock climbing) has exercised admirable restraint in not spending his investment gains, he did take enough cash out of his portfolio to buy his mother's used Ford Explorer for $17,000 last year, after he got his driver's license. That's a dividend any teen can appreciate. (See "The Power of Compounding," above.)
A more realistic example is equally powerful. Had you invested $10,000 in the Standard and Poor's 500 stock index in 1978 and reinvested all dividends, twenty years later your shares would have been worth $244,279.
So the reason that your youth is such an advantage is that you have decades of investing ahead of you. And while the stock market is famous for going up and going down, over any thirty-year time span since its creation, you never would have lost money in the market, including during the period that encompasses the Great Depression.
The lesson here? Get money in the market when you're young, leave it there, and add to it regularly. (See "How Long Until My Money Doubles? The Rule of 72," page 12.)
How Long Until My Money Doubles? The Rule of 72
FOR GENERATIONS, STUDENTS of all ages have had one big question for their teachers: Will this be on the test?
If there were such a thing as the test of life, the Rule of 72 would definitely be on it. Memorize it, because you will use it, I promise. It also has the great virtue of being easy to remember and use.
The Rule of 72 is very straightforward. To find out how long it will take your money to double, divide the number 72 by the rate of return you expect to get. The answer will equal the number of years it will take your money to double at that rate.
Let's do the math. If you are earning a 10 percent rate of return on your money, divide 72 by 10 to equal 7.2. (72/10=7.2) It will take 7.2 years for your money to double. Getting an 8 percent return? 72/8=9. It will take 9 years for your money to double. Getting 5 percent? 72/5=14.4. At 5 percent, you're looking at 14.4 years before it doubles.
This is the kind of equation you should be carrying around in your brain's toolbox. Haul it out whenever you need to make some quick calculations about investment returns.
Ten years from now, if someone tries to sell you on a product by saying you can double your money in three years, you'll be able to quickly figure that they are promising you an impossible-to-guarantee 24 percent a year. You'll know better than to fall for that.
TEENS AND WALL STREET
HAVE YOU SEEN THE TV ADS FOR CHARLES SCHWAB, THE DISCOUNT and online brokerage firm? One recent ad shows eighteen-year-old Russian tennis star Anna Kournikova talking with competitors not about tennis strategy or athletic endorsements but about price-earnings ratios and mutual funds. The message is clear: even a young, busy, world-ranked athlete has the time and the brains to learn about investing. Schwab, like lots of companies, has taken notice of your generation.
Everyone has heard of the baby boomers—your parents' generation, which was born in the fifteen or so years after World War II and has had a huge impact on the economy and popular culture. But the current teenage population—often called "Generation Y" or "Generation Next"—is bigger than the baby boom generation. There are now about 39.6 million kids between the ages of ten and nineteen, according to the Census Bureau, and that number will climb to 41.6 million by 2005.
That growth hasn't escaped Wall Street, which is looking for ways to teach kids about investing in the hope that they'll become longtime customers. Several firms have started mutual fund programs aimed at young investors, such as American Express, Stein Roe, and USAA. Stein Roe started its Young Investor Fund in 1994, after the firm's survey of junior high school kids showed that they were interested in learning about money and personal finance but had no formal channels to do so. The fund now has 200,000 investors and $1 billion in assets under management. Some 70 percent of the accounts are custodial accounts, with an average balance of $4,106; the average shareholder is about twelve years old.
MERRILL LYNCH, the big brokerage firm, commissioned a telephone survey of kids between the ages of twelve and seventeen in February 2000. Below are some excerpts from the survey results. The survey was conducted by International Communications Research (ICR), a research firm that questions teens about different issues, as part of its TeenEXCEL project. While ICR obviously didn't talk to every teen in America, it designed its research taking into account variations in the teen population. The result is that the answers are "projectable to the whole population"—in other words, they fairly represent the whole population of U.S. kids ages twelve to seventeen. It's fun to see how you measure up against your peers.
One note: for the different categories below, keep in mind that multiple answers were accepted, so the percentages may add up to more than 100 percent. (For instance, a teen might have responded that she gets money both from her parents and from doing odd jobs around the house.)
>> Where do you get money?
83% get money from their parents when they need it.
72% earn money by doing odd jobs.
38% have a regular allowance.
22% have regular jobs (older teens are more likely to have such jobs).
>> What kind of financial accounts do you have?
Of all twelve-to-seventeen-year-olds:
65% have a savings account.
22% have a checking account.
12% own mutual funds.
12% own stocks.
>> Have any of your classes in school ever discussed saving money or investing?
Male 55% yes Female 50% yes
45% no 50% no
>> What do you do with your money?
59% usually spend half and save half of the money
24% save most of it.
17% spend most of it immediately.
>> How much do you earn at your job?
The median wage they earn is $5.70 an hour.
The median number of hours they work is 15 hours a week.
>> What do you save for?
42% are saving for college.
30% are saving to buy a car.
18% are not saving for anything in particular or don't know.
8% are saving for a specific item.
7% are saving to buy clothes.
2% are saving to pay car expenses.
SOURCE: MERRILL, LYNCH, PIERCE, FENNER & SMITH INC. REPRINTED WITH PERMISSION.
Salomon Smith Barney started its Young Investors Network in 1997; the project's Web site has about 12,000 registered users. Salomon Smith Barney also started a pilot program of three-day in-school investing workshops in selected schools and is trying out a summer workshop on investing for girls. Since the Young Investors Network started, the company has seen a 22 percent increase in custodial accounts, although, says Mindy Ross, Salomon Smith Barney senior vice president, other factors could have contributed to that.
But the business world isn't interested solely in the business you'll do with them someday—they're looking at the considerable economic power you wield right now. Think you don't have money to put into the stock market? Think again. Teens spent about $153 billion in 1999, according to Teenage Research Unlimited, a market research firm. In 1999, the newspaper USA Today called you "The Richest Generation of Teens," finding that nearly half of the kids surveyed had spent at least $20 in stores within the last week. Since most teens don't have to pay for things like housing, groceries, and electricity, as their parents do and as they will once they're living on their own, their income is largely "discretionary."
So now is the perfect time to get started investing—even with small amounts of money
Chapter 1. What’s In This For You?
When it comes to making money in the stock market, time is the best tool for maximizing profit. Why you should start now.
Chapter 2. Stock Market 101.
Take a brief and Street Wise tour of investing basics to learn what you need to get going.
Chapter 3. Stock Picking 102.
Now that you’ve mastered the basics, practice the finer points of stock picking, reading a ticker, finding your investing style, and more.
Chapter 4. The Nuts and Bolts of Buying Stocks.
There’s nothing like investing real money in stocks to get your attention. Here are some strategies for buying and selling successfully.
Chapter 5. “I Remember My First Stock”.
Financial notables talk about their early investment successes and mistakes and the lessons they learned from their first market moves.
Chapter 6. Mutual Respect: Funds.
What are the pros and cons of investing in mutual funds? Which funds are especially kid-friendly? Also, a kid’s fund manager talks about his strategies.
Chapter 7. Bear Wrestling.
If you’re into investing for the long haul, someday you’ll face a bear market - a sustained market slide. Advice on dealing with the downside.
Chapter 8. Joining the Club.
Investment clubs are a terrific way to learn more about investing, meet kids with similar interests, and maybe even make some money. Here’s how to start one.
Chapter 9. Trading Games.
Investing contests get the competitive juices flowing, and the prizes aren’t bad either. Check out some of the most popular stock market games and learn some winners’ tips. Also: can you replicate success in stock market games?
Chapter 10. Navigating the Internet and other Resources.
Take a look at some fabulous resources, including Web sites run by teens and others managed by financial firms.
Chapter 11. Making A Living on Wall Street.
If you’re really hooked, you may be considering a career in the financial world. Here is a guide to getting started.