Do Business Well

So far I’ve talked about using savings accounts and CDs to save up stacks of cash. There are lots of other investments out there— stocks, bonds, precious metals, commodities, and many more. Most of these kinds of investments don’t really work for teenagers because they require large amounts of money to get started.

There’s one nonbank investment that works just fine for teenagers—mutual funds. They don’t require lots of money to get started, and they can make your savings grow faster than a bank account. Here’s how they work.

Let’s say you have $500 to invest in something. You could buy 100 shares of a stock trading at $5 per share, but that’s putting all your eggs in one basket. If the stock does poorly, you’ll lose some or all of your investment. Not a good idea.

Better to spread your money around. One way to spread your investment is to buy shares of stock in several companies, but I’ll be honest here; in the stock world, $500 is not a lot to work with. If you spent it buying $100 worth of stock in five companies, the stockbroker might charge you $200 or more just to handle the transactions. Your investment will have to yield over 40% just to break even. Fat chance. And too expensive.

Here’s another way: Find nine friends who each have $500 to invest. Put all your money together to create a $5000 fund. Now you can buy several stocks with this fund and spread the risks and costs between you. The stockbroker’s fees are less because you’re buying more shares of each stock. Your share in this fund is 10% of every stock owned by the group. If one company doesn’t do well, the performance of the others can offset the loss.

The problem with that plan is that it’s hard to find nine friends with that much money to invest. And even if you find them, trying to agree on which investments to make can wipe out a bunch of friendships in a hurry. Fortunately, you don’t have to form an investment fund with your friends. Many investors have already formed funds just like this one, but bigger. They’re called mutual funds.

 

A Big Club For Your Money

With a mutual fund, thousands of people invest varying amounts, and professional managers choose which investments will be best for everyone in the group. Since the fund manager often has millions and millions of dollars to work with, he or she can spread the money around, investing in 50 to 100 different securities (stocks, bonds, etc.).

In other words, your $500 (or whatever amount you invest) is pooled with millions of dollars and invested by professionals who follow the financial markets daily.

Mutual funds are a popular idea. There are hundreds to choose from, each with specific investment goals to appeal to certain kinds of investors. Here are the most popular types of mutual funds:

• Growth funds invest your money in securities (stocks, bonds, etc.) that will (hopefully) increase in value. Aggressive growth funds invest in new and growing industries and companies with risky but potentially big-time futures. Moderate growth funds take their chances with more established, growing companies. If these companies do well, the value of their stocks rise, and so does the value of your mutual fund shares. If they do poorly, the value goes down.
• Equity income funds invest in stocks that pay regular dividends. You receive a quarterly check of your share of all the dividends paid to the fund. If you prefer, you can arrange to have your dividends reinvested (i.e., used to buy more shares in the fund).
• Growth and income funds invest in both kinds of securities. If the fund manager is successful, thevalue of your shares goes up, and you get some dividend money each quarter.
• Money market funds invest in bank CDs (certificates of deposit), Treasury bills (short-term loans to the government), and other short-term loans to corporations and municipalities (local governments).
• Bond funds invest in bonds, which pay steady interest.

Some mutual funds focus on a specific portion of the economy as a way to achieve their goals. Tax-free funds invest in government bonds; the government makes investing in these lower-yield bonds enticing by allowing you to exclude the dividends from your taxable income. Most teenagers don’t have tax bills large enough to justify this type of investment.

Other funds invest in a particular industry, region, or country: a sector fund may invest only in high- technology companies, or agricultural firms, or those in the aerospace business. International funds invest in specific foreign regions or countries, such as companies based in Asia or those doing business in Mexico. Precious metal funds invest in companies that mine and sell gold, silver, or platinum.

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