How to Begin Investing When Young

by C. Taylor

The young have a two-fold advantage of time when investing. First, the increased investment period allows young investors to focus more heavily on stocks, which can be volatile in the short-term, but this volatility averages out over the long haul. This means the young investors can enjoy the higher returns of stocks, rather than bonds, without incurring significant risks. The second advantage of time is compound interest, which allows your investment to grow over the long term. To illustrate, a 40-year old investor who invests only $5,000 at 10 percent interest will have $33,638 by the age of 60. However, a 20-year old investor, who enters the same investment, will have $226,296 at age 60.

Talk to a local investment firm about a starter account. Several firms have special rates to encourage young investors. You can also start an investment account online through online brokerages, such as AmeriTrade, Scottrade or ETrade.

Save any extra income you earn. If you earn $100 extra income per week cutting grass, don't blow it on games or partying, put at least $50 of it toward your investment goals. That $50 per week amounts to $600 per year. If you can put away more than that, that's even better.

Choose good, long-term stocks in a variety of sectors. You don't need to crunch numbers to do this. Look around at the biggest companies, with which you are already familiar: Coca-Cola, Wal-Mart, Nike, Apple, Microsoft are all examples of "blue chip" stocks. These are strong companies that are unlikely to go anywhere. If you want to really diversify, consider a mutual fund. These funds are composed of numerous, well-rounded stocks. There's usually a fee associated with mutual funds, so your overall return is lower, but there's very little risk, such as the technology sector taking a hit or locusts decimating the coffee industry.

Pay off any high-interest loans, such as credit cards, before filtering money into an investment account. There's no point paying 30 percent on a loan only to make a lower percent in an investment.

Don't gamble. Young investors seem to love playing the big-shot by day-trading. Although there can be massively exciting profit/loss swings, in the end, short-term traders don't fair so well. If you must gamble, open a separate "play" account and keep your real investments in long-term stocks.