Teach Your Teen the Art of Investing

Creating a Portfolio

When it comes to money, you never put all your eggs in one basket, so diversification is the first rule to teach your teen. The two of you should talk about how much she has in her savings account and decide how much to pull out for investing; you might suggest that 20 percent is a good amount. This leaves the majority of her savings in an accessible, guaranteed instrument (her savings account) and takes only a portion to put into the higher promise but higher risk of the stock market.

Now comes the fun part. In what company would your teen like to invest? You're in relatively safe hands here, try to relax. If she's permitted to “buy what she knows,” she's likely to choose Coca-Cola, McDonald's, Disney—all good solid “blue chip” stocks.

After your teen expresses an interest in a particular stock, more research is necessary. She may love a particular type of computer and want to buy that stock, but if the company is having difficulty in its foreign division or other performance problems, you'll want to learn that now. Show her the steps you can take to check out a company:

• Call the company for a copy of the annual report; it will tell her about what goals the company has set and how well it has met them.
• Visit the library and take a look at Value Line Investment Survey, Moody's Handbook of Common Stocks, or S & P Reports, any of which will provide some insight into the company's track record and how the analysts feel about it.
• The online services (such as the World Wide Web, the Internet, or America Online) also offer a wealth of financial information. If you subscribe to one, investigate what information is available to you online.

If there doesn't seem to be any bad news the company is sweeping under the carpet, then go for it!

Opening a Brokerage Account

Whether you deal with your own broker, contact a discount broker, or purchase stock through one of the new online services, you will need to set up an account with your teen. The process is much like opening a bank account.

Until your teen is 18 or 21 (depending on your state of residence), any brokerage account you set up must be a custodial one. Though you'll conduct all transactions, you can set up the account using her social security number for tax purposes. (Remember, too, that legally she'll have access to this money the moment she turns legal age, so don't use the account to stash anything you don't want her to have when she's 18 or 21.)

When you make your stock purchase, ask the broker for how the company is listed and on which exchange (if you haven't already picked up that information in your research).

And if the commissions (the amount charged by the firm that buys or sells the stock for you) seem high compared to the size of the investment, chalk it up to “education.” If you're fortunate, the money will grow and the commissions will seem smaller as the account grows bigger.

Following the Stock

With luck, charting your teen's market investment can become as involving as following your favorite baseball team throughout a season. A benefit of “buying what you know” is that either of you may read articles about the company, and you can check the newspaper daily to see how the stock reacts to various news (like a new product announcement or a poor retail Christmas season).

If you have a home computer with an online service, your teen can set up a customized portfolio to follow his own investments. It makes investing more “real” and more fun.

What do you tell your teen as his $500 investment becomes $475 after the company announces bad news? That's part of the risk and part of the benefit of not needing to sell under pressure. If he hangs in there, history is on his side—the stock will come back up again, and he'll see a profit.

Translating the Financial Pages

To follow the stock, you'll need to show your teen how to read the stock listings. The sample stock listingillustrates what to show him.

Show your teen a sample stock listing and explain the basics of reading it.

52-Week			A	B	C
High	Low	Stock	Div	Yld %	P/E	Sales 100s	High	Low	Last	Chg
					A
16 1/4	9 3/4	A Plus	...	...	dd	393	13 3/8	13	13	-3/8
10 1/2	4 3/8	AAON	...	...	13	36	5 1/8	4 3/8	4 1/2	+1/8
15	10	ABC Bc s	.40	2.8	11	443	15	14 1/2	14 1/2	-1/4
27 5/8	17 1/8	ABC Rail	...	...	19	4	24 3/4	24 1/2	24 1/2	+1/4
55	10 5/8	ABR Int s	...	...	cc	1824	53 1/4	53 3/4	55	+7/8
19 3/4	12	ABT Bld	...	...	14	194	19 1/4	18 1/2	19 1/4	...
30 1/4	13	ACC Cp	...	...	dd	1971	29 7/8	28 5/8	29 5/8	+1 1/8
19 3/4	9 1/8	ACT MI	...	...	93	175	13 7/8	13 1/2	13 7/8	+1/8
27 1/2	5 3/4	ACT Net n	...	...	dd	2733	24	22 1/4	23 7/8	1 1/4

The figures in the far left columns report the high and low of the stock price for the previous 52 weeks.

The figures on the far right show the market activity for the stock price for that day. Prices are reported in 1/8-point increments (1/8 of a dollar is 0.125 cents). The following list describes the other elements in the figure:

1. Dividend. This reflects the latest annual dividend paid by that stock on each share owned.
2. Yield. This is the stock's latest annual dividend expressed as a percentage of that day's price.
3. Price/earnings ratio. This is the price of the stock divided by the earnings reported by the company for the latest four quarters.

Another Possibility: Mutual Funds

Though buying shares of a specific company is fun, some people prefer investing in mutual funds. Buying mutual funds is like letting someone else select your stock portfolio: You buy shares in the mutual fund and the fund managers worry about buying and selling the stocks in which the fund has chosen to invest.

The initial mutual fund investment can be as low as $100–$500, and later purchases can generally be in any amount you desire. Like stocks, mutual fund track records can be researched by contacting the fund directly for information; you can also ask a broker or look for information at the library.

Mutual funds are known for their specialty. “Growth” funds take on greater risk with the hope of long-term reward. “Income” funds select stocks for their capability to pay good dividends. Other funds specialize in certain industries, such as utilities or the entertainment industry.

Recently, the Stein Roe Family of Funds has created a Young Investors Fund, which specializes in stocks that appeal to young people. Their financial goal is one of long-term growth, and investors receive teen-oriented information about money management and investing.

Excerpted from The Complete Idiot's Guide to Parenting a Teenager © 1996 by Kate Kelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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