Should a high-school student invest their (relative meager) savings?

Question

I am a high school student, I don't really have much money, between one and two grand in my savings account. However, I have friends who are investing in both penny stocks and stocks. I do not really know much about the subject, but I do find it interesting. I receive no interest from my checking account, so I have been told I am misusing my money by not doing anything with it. From the suggestions of other people and myself I have narrowed down my options to:

• Investing in stocks
• Investing in penny stocks
• Investing in bonds
• Saving up for college
• Save up for emergencies
• Start thinking about retirement (which I have been told is never too early to start thinking about)

Do you think investing in stocks with a small budget would be a good option?

Answer 1

You should invest in that with the best possible outcome. Right now that is in yourself. Your greatest wealth building tool, at this point, is your future income. As such anything you can do to increase your earnings potential. For some that might mean getting an engineering degree, for others it might mean starting a small business. For some it is both obtaining a college degree and learning about business.

A secondary thing to learn about would be personal finance.

I would hold off on stocks, at this time, until you get your first real job and you have an emergency fund in place.

Penny stocks are worthless, forget about them.

Bonds have their place, but not at this point in your life.

Saving up for college and obtaining a quality education, debt free, should be your top priority.

Saving up for emergencies is a secondary priority, but only after you have more than enough money to fund your college education.

You can start thinking about retirement, but you need a career to help fund your savings plan. Put that off until you have such a career.

Investing in stocks, at this juncture, is a bit foolish. Start a career first. Any job you take now should be seen as a step towards a larger goal and should not define who you are.

Answer 2

You have a few correlated questions here:

Can you invest with limited capital?

Yes you can. There are only a few investment strategies that require a minimum contribution and those aren't ones that would get a blanket recommendation anyway. Investing in bonds or stocks is perfectly possible with limited funds.

When should I start investing?

You're never too young to start. The power of interest means that the more time you give your money to grow, the larger your eventual gains will be (provided your investment is beating inflation). If your financial situation allows it, it makes sense to invest money you don't need immediately, which brings us to:

How much of my money should I invest?

This is the one you have to look at most. You're young but have a nice chunk of cash in a savings account. That money won't grow much and you could be losing purchasing power to inflation but on the other hand that money also isn't at risk. While there are dozens of investment options¹ the two main ones to look at are:

• bonds: these are fixed income, which means they're fairly safe, but the downside is that you need to lock up your money for a long time to get a better interest rate than a savings account

• index funds that track the market: these are basically another form of stock where each share represents fractions of shares of other companies that are tracked on an index such as the S&P 500 or Nasdaq. These are much riskier and more volatile, which is why you should look at this as a long-term investment as well because given enough time these are expected to trend upwards. Look into index funds further to understand why.

But this isn't so much about what you should invest in, but more about the fact that an investment, almost by definition, means putting money away for a long period of time. So the real question remains: how much can you afford to put away? For that you need to look at your individual situation and your plans for the future. Do you need that money to pay for expenses in the coming years? Do you want to save it up for college? Do you want to invest and leave it untouched to inspire you to keep saving? Do you want to save for retirement? (I'm not sure if you can start saving via IRAs and the like at your age but it's worth looking into.) Or do you want to spend it on a dream holiday or a car? There are arguments to be made for every one of those.

Most people will tell you to keep such a "low" sum in a savings account as an emergency fund but that also depends on whether you have a safety net (i.e. parents) and how reliable they are. Most people will also tell you that your long-term money should be in the stock market in the form of a balanced portfolio of index funds. But I won't tell you what to do since you need to look at your own options and decide for yourself what makes sense for you. You're off to a great start if you're thinking about this at your age and I'd encourage you to take that interest further and look into educating yourself on the investments options and funds that are available to you and decide on a financial plan. Involving your parents in that is sensible, not in the least because your post-high school plans will be the most important variable in said plan.

To recap my first point and answer your main question, if you've decided that you want to invest and you've established a specific budget, the size of that investment budget should not factor into what you invest it in.

---

^{1 - For the record: penny stocks are not an investment. They're an expensive form of gambling.}

Answer 3

At your age (heck, at MY age :-)) I would not think about doing any of those types of investments (not savings) on your own, unless you are really interested in the investment process for its own sake, and are willing to devote a lot of time to investigating companies in order to try to pick good investments.

Instead, find a good mutual fund from say Vanguard or TRP, put your money in there, and relax. Depending on your short-term goals (e.g. will you expect to need the money for college?) you could pick either an index fund, or a low-risk, mostly bond fund.

Answer 4

IMHO It is definitively not too early to start learning and thinking about personal finances and also about investing.

• As for investing real money, I agree with Pete B's answer that your financial priorities should be education and emergency fund right now. However, how about getting an extra holiday job and taking a part of the earnings as "toy money" to learn investing?

• If you like to try stock market games, make sure to use one that includes a realistic fee structure simulation as well - otherwise there'll be a very unpleasant awakening when switching to reality...

• I'd like to stress the need for low fees with the brokerage account!
  Sit down and calculate how much fees different brokers take for a "portfolio" of say, 1 ETF, 1 bond, 1 share of about $500 or $1000 each (e.g. order fee, annual fee, fee for paying out interest/dividend).

• In my experience, it is good if you can manage to make the first small investing steps before starting your career. Real jobs tend to need lots of time (particularly at the beginning), so time to learn investing is extremely scarce right at the time when you for the first time in your life earn money that could/should be invested.
  I'm talking of very slowly starting with a single purchase of say an ETF, a single bond next time you have saved up a suitable amount of toy money, then maybe a single share (and essentially not doing anything with them in order to avoid further fees). While such a "portfolio" is terrible with respect to diversification and relative fees*, this gives you the possibility to learn the procedures, to see how the fees cut in, what to do wrt taxes etc. This is why I speak about toy money and why I consider this money an investment in education.

* An order fee of, say, $10 on a $500 position are terrible 4% (2 x $10) for buying + selling - depending on your local taxes, that would be several years of dividend yield for say some arbitrary Dow Jones ETF. Nevertheless, purchase + sale together are less than 3 cinema tickets.

Answer 5

The advice to invest in yourself is good advice. But the stock market can be very rewarding over the long pull. You have about 45 years to retirement now and that is plenty long enough that each dollar put into the market now will be many dollars then.

A simple way to do this might be to open a brokerage account at a reputable broker and put a grand into a very broad based all market ETF and then doing nothing with it. The price of the ETF will go up and down with the usual market gyrations, but over the decades it will grow nicely. Make sure the ETF has low fees so that you aren't being overcharged.

It's good that you are thinking about investing at a young age. A rational and consistent investment strategy will lead to wealth over the long pull.

Answer 6

Is investing a good idea with a low amount of money?

Yes. I'll take the angle that you CAN invest in penny stocks. There's nothing wrong with that.

Risk Tolerance

The (oversimplified) suggestion I would make is to answer the question about your risk aversion. This is the four quadrant (e.g., http://njaes.rutgers.edu:8080/money/riskquiz/) you are introduced to when you first sit down to open your brokerage (stocks) or employer retirement account (401K). Along with a release of liability in the language of "past performance is not an indicator..." (which you will not truly understand until you experience a market crash).

The reason I say this is because if you are 100% risk averse, then it is clear which vehicles you want to have in your tool belt; t-bills, CDs, money market, and plain vanilla savings. Absolutely nothing wrong with this. Don't let anyone make you feel otherwise with remarks like "your money is not working for you sitting there".

It's extremely important to be absolutely honest with yourself in doing this assessment, too. For example, I thought I was a risk taker except when the market tumbled, I reacted exactly how a knee-jerk investor would.

Absence of Perfect Assessment

Also, I feel it's not easy to know just how honest you are with yourself as we are humans, and not impartial machines. So the recommendation I would give is to make a strong correlation to casino gambling. In other words, conventional advice is to only take "play money" to the casino. This because you assume you WILL lose it. Then you can enjoy yourself at the casino knowing this is capital that you are okay throwing in the trash.

I would strongly caution you to only ever invest capital in the stock market that you characterize as play money. I'm convinced financial advisors, fund managers, friends will disagree. Still, I feel this is the only way you will be completely okay when the market fluctuates -- you won't lose sleep.

Play Money

IF you choose this approach, then you can start investing any time. That five drachma you were going to throw away on lottery tickets? transfer it into your Roth IRA. That twenty yen that you were going to ante in your weekly poker night? transfer it into your index fund. You already got past the investors remorse of (losing) that money.

IF you truly accept that amount as play money, then you CAN put it into penny stocks. I'll get lots of criticism here. However, I maintain that once you are truly okay with throwing that cash away (like you would drop it into a slot machine), then it's the same whether you lose it one way or in another investment vehicle.

Answer 7

Between 1 and 2 G is actually pretty decent for a High School Student.

Your best bet in my opinion is to wait the next (small) stock market crash, and then invest in an index fund. A fund that tracks the SP500 or the Russel 2000 would be a good choice. By stock market crash, I'm talking about a 20% to 30% drop from the highest point. The stock market is at an all time high, but nobody knows if it's going to keep going.

I would avoid penny stocks, at least until you can read their annual report and understand most of what they're claiming, especially the cash flow statement. From the few that I've looked at, penny stock companies just keep issuing stock to raise money for their money loosing operations.

I'd also avoid individual stocks for now. You can setup a practice account somewhere online, and try trading. Your classmates probably brag about how much they've made, but they won't tell you how much they lost.

You are not misusing your money by "not doing anything with it". Your classmates are gambling with it, they might as well go to a casino.

Echoing what others have said, investing in yourself is your best option at this point. Try to get into the best school that you can. Anything that gives you an edge over other people in terms of experience or education is good. So try to get some leadership and team experience. , and some online classes in a field that interests you.

Answer 8

If you're not rich, investing money will produce very small return, and is a waste of your resources. If you want to save until you die, then go for it (that's what investment companies want you to do).

I suggest invest your money in building a network of friends who will be future asset for you. A group of friends helping each other have a much higher prospect of success.

It has been proven that approximately 70% of jobs have been obtained through networking. Either through family, or friends, this is the vast majority. I will reiterate, invest on friends and family, not on strangers who want to tie down your money so they can have fun for the moment, while you wait to have fun when you're almost dead.

Added source for those who are questioning the most well known fact within organizations, I'm baffled by the level of ignorance.

Linkedin

Recruitment Blog

...companies want to hire from within first; only when there are no appropriate internal candidates will they rely on referrals from employees (who get a bonus for a successful hire) and people who will approach them through informational meetings. The latter category of jobseekers (you) have the benefit of getting known before the job is "officially posted."

For those who believe loaning money to friends and family is a way of losing money -> this is a risk well worth taking -> and the risk is much lower than loaning your money to strangers -> and the reward is much higher than loaning your money to strangers.

Answer 9

Nobody has mentioned your "risk tolerance" and "investment horizon" for this money. Any answer should take into account whether you can afford to lose it all, and how soon you'll need your investment to be both liquid and above water. You can't make any investment decision at all and might as well leave it in a deposit-insured, zero-return account until you inderstand those two terms and have answers for your own situation.

Answer 10

If you have no immediate need for the money you can apply the Rule of 72 to that money. Ask your parent's financial advisor to invest the money. Based on the rate of return your money will double like clockwork.

At 8% interest your money will double every 9 years. 45 years from now that initial investment will have doubled 5 times. That adds up pretty fast. Time is your best friend when investing at your age.

Odds are you'll want to be saving for a college education though. Graduating debt free is by far the best plan.