May 6, 2021
Stock market glossary: Fundamentals of investing for kids and teens
As parents, it’s easy to wonder if we’re doing all we can do to make sure our kids have a solid financial future. One thing is for sure — lessons in saving for investing are key. And that can be easy, too. No expertise is needed to know the basics. We’re here to bring you investing for kids — and to show you how small savings today can make a big difference in their lives.
Use this handy glossary to help your kids become confident investors, with your guidance.
An investment is something you buy with the goal that it will increase in value over time. Investing in the stock market gives you a chance to grow your money. (P.S., investment accounts for kids = a great place to start. Learn how Greenlight Max can get your kids on track.)
The “stock market” refers to the buying and selling of stocks and other types of investments. These can be sold between buyers and sellers in stock exchanges. Two of the most well-known are the New York Stock Exchange (NYSE), the largest in the world, and the Nasdaq Stock Market, the first electronic exchange.
Compound growth is a financial term that describes the average rate of growth of an investment over multiple years. Investors use the Compound Annual Growth Rate formula (CAGR) to calculate their average investment returns year-over-year.
The principle of compounding fuels both growth for investments and interest for savings. It works like this: Let’s say you invest an initial amount of $1,000, and after one year, you see a return of 10%, or $100. That means the value of your investment is now $1,100.
Imagine your returns the next year. If you earn 10% again on your $1,100 investment — your investment value is now $1,210. If the cycle repeats the following year, you’ll end up with $1,331. And the next year? $1,464. Woah. That’s the power of compounding for investments. But, remember: Compounding looks different for everyone. Depending on your choice of investments and market conditions, your annual growth rate could vary.
Types of investments
Stock is a share of ownership of a company. A share is worth a certain percentage of the company. If the business makes money, the value of the stock may increase. The shareholder also may receive income from the profits each year as dividends. A dividend is a portion of a company’s profit that is paid to its shareholders, usually on a regular schedule. If the business does not do well, an investor could lose the money.
A bond is a loan to a company (or government) with the promise that they’ll repay you. With interest! Bonds generally do not return as much as investing in stocks — but if a company runs into trouble, bondholders are paid before shareholders.
Exchange traded fund (ETF)
An exchange traded fund (ETF) is a collection of assets, like stocks and bonds, that trade like a stock on the stock exchange. Most ETFs try to track the performance of an index, either the overall market or a smaller subset. Some ETFs invest in one industry — like technology or real estate. Other ETFs include different types of assets, like bonds or commodities — which are goods or resources, like energy (oil) and precious metals (gold).
A mutual fund invests a pool of money from many investors into a combination of stocks, bonds, or more. This combination, known as its portfolio, is managed by a professional money manager.
Risk and diversification
In the investing world, risk means the level of chance that an investment could decrease in value. Higher risk investments usually have a higher potential gain (or loss). Lower risk investments usually have a lower potential gain (or loss). Your investment goals, the amount of risk you are comfortable with and the length of time you will be investing really matter when determining the level of risk to accept.
Investing in only one company can be risky. If that company has a tough year, you could lose some of your money. But if you’re invested in another company that does well, it can even out. That’s how you start to diversify. Diversifying means investing in different things so that your money is spread out over many investments. Diversifying lowers your risk and can keep your investments safer.
Your investment portfolio is your collection of investments. What combination of assets has the highest probability of meeting your financial goals? That’s what should make up your portfolio. Greenlight can recommend a diversified investment with an allocation of assets that meets the level of risk that is acceptable for you.
Realized gains and losses
Investments are capital assets. If you sell an investment — like a stock or ETF — for more than the price you paid, that amount is a realized capital gain. If you sell it for less than the price you paid, it is a realized capital loss. Any changes to the value of investment while you still own the stock are known as “unrealized” gains and losses.
Unrealized gains and losses
The gains and losses you see during the time you own an investment are "unrealized." They are based on the current value of your investment compared to the price you paid for it.
Stock prices can change rapidly. Volatility describes how widely (how high and how low) a stock's price has fluctuated over time. In most cases, the higher the volatility, the riskier the investment.
Investing for the long-term usually minimizes the impact of volatility that might exist in the stock market in the short-term. Now, dive into our Parent’s Complete Guide to Investing and get started.
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