Stocks 101 For Teens: Opening Your First Online Brokerage Account

Nowadays, some online brokers also offer great mobile apps that last you monitor your account on the go.

Nowadays, some online brokers also offer great mobile apps that last you monitor your account on the go.

As our younger readers might have noticed, there aren't many online resources for teenagers and young adults who want to buy stocks (at least not many resources that have been updated within the past 10 years). We are here to help you get started. Here's how you open your first online brokerage account.

 

Custodial Accounts

If you are under 18, your parent or guardian will need to open a custodial account account for you with your broker of choice. With a custodial account, the account will be under your name, as well as your parents' (who bear legal responsibilities for the account on your behalf). You own the money in the account, and once you turn 18, you become the sole owner of the account. In most cases, a custodial account is the way to go.

 

Choosing An Online Brokerage Firm

Once your parents agree to opening a custodial account for you, the next step is to pick a brokerage firm. Online brokerage firms are perfect for first-time investors looking to buy stocks & ETFs because they typically charge have lower minimum balance requirements and commissions. We highly, highly recommend that you read our our explanation of online brokerage fees here. If you have time, check out this helpful article as well.

There are 3 factors for a young investor to consider when choosing an online broker: (1) the cost of trading with a given broker, (2) the amount of educational resources that the broker offers and (3) the quality of the mobile & desktop trading tools that the broker makes available. As you become a more experienced trader, you will also have to consider the types of assets you want to trade, since some online brokers also allow you to trade mutual fund shares, futures and forex (in addition to stocks). But since this is your first foray into trading, we are going to suggest that you stick to stocks and ETFs for now.

You want an online broker with low trading costs, lots of educational resources and a great mobile/desktop trading platform. However, you'll often find that online brokers excel in one area and neglect others. For example, Scottrade is great for trading stocks cheaply, but good luck using their mobile app. Keep in mind, though,  that a shiny new mobile application is probably (definitely) the least important of all criteria when it comes to choosing an online broker (plus, Scottrade has a great desktop trading platform). For the relatively lower price of trading, Scottrade is still a great value. No broker is going to be a small dunk in all three areas. You are going to have to weigh the pros and cons of each broker according to your needs, and thats where we come in.

Below are a few brokers that you should check out:

>ShareBuilder

Remember when we said that no broker in all three categories? Well, ShareBuilder comes close. At $6.95 per trade, ShareBuilder is right there with Scottrade in terms of affordability (both online brokers offer have the lowest cost per trade among the major online brokers, next to discount brokers like OptionsHouse and Interactive Brokers...we will discuss discount bikers in a bit). Furthermore, while most online brokers require that you initially deposit anywhere from $500 to $2500 to open an account, ShareBuilder does not.

ShareBuilder's Knowledge Center is a great educational tool for young traders. Their mobile app lets you trade stocks, ETFs and options on the go while providing detailed stock quotes.

>TDAmeritrade

TDAmeritrade is the only other major online broker (besides ShareBuilder) that doesn't require a minimum balance to open an account. However, TDAmeritrade is more expensive on a per-trade basis (each trade costs $9.99).

TDAmeritrade offers the some of the best mobile/web trading platforms, and is the #1 choice for low-frequency traders who appreciate intuitive tools that allow them to monitor their accounts on the go. TDAmeritrade also offers the most comprehensive research and market commentary. 

The only other online broker that offers better trading platforms that TDAmeritrade is E*Trade. However, E*Trade has two drawbacks. The first is that it the minimum required deposit to open an E*Trade account is $500. The second is that E*Trade doesn't offer virtual trading. With virtual trading you can trade without purchasing actual stock (you get virtual shares that you can monitor). This is a handy tool for  traders who want to test out trading strategies and is especially useful for young investors who are new to trading. Virtual trading is a common feature on most online broker trading platforms, including TDAmeritrade's.

>OptionsXpress

OptionsXpress is cheaper for trading options and futures then it is for trading stocks (they charge a $9 per trade fee for stocks). Still, they have no minimum required balance and a recently updated mobile application, making OptionsXpress an attractive alternative.

OptionsXpress really excels in the educational resources department. They have webinars, articles and newsletters that are great for both beginners and experienced investors. They also have a useful virtual trading platform that allows you to practice trading $25,000 worth of a stocks (or whatever assets you choose). This allows you to practice trading while you are becoming familiar with the OptionsXpress platform.

 

 

 

 

 

Stock Basics (Part 1) — What Is A Stock?


Alibaba Chairman Jack Ma celebrates his company's IPO at the New York Stock Exchange on September 19, 2014  — The Biggest Stock Offering In History. (Photo: Mark Lennihan/AP   

Alibaba Chairman Jack Ma celebrates his company's IPO at the New York Stock Exchange on September 19, 2014  — The Biggest Stock Offering In History. (Photo: Mark Lennihan/AP

 

Stock Basics (Part 1) — What Is A Stock?

Author: Emmanuel Modu ( eumodu@gmail.com )

A stock represents ownership in a company. Therefore, when you purchase stock, you become part owner of the company. The number of shares of a company's stock that you own generally indicates what portion of the company you own. For example, Walt Disney has sold 1.72 billion shares to the public. So if you owned ten shares of the company's stock, the percentage of the company you would own is .0000006% (10/1,720,000,000 = .0000006%). In general, companies sell stock to the public through a process called an Initial Public Offering (IPO) in order to get enough money to build their businesses. At the time of this writing, the biggest IPO in history was on September 20, 2014 when Alibaba Group Holdings (stock symbol: BABA) raised about $25 billion.

Now, let's consider what a stock is not. When you purchase stock, you are investing in a company. This is very different from when you purchase a corporate bond in which you are lending money to a company. When you buy the stock of a com¬pany, there is no guarantee that you will get your money back or that your stock will go up in value. By contrast, when you purchase a corporate bond, you will be repaid unless the company goes bankrupt. Even if the company does go bankrupt, the company's lenders will get paid back first (with the proceeds of the sale of the company's assets) before the stockholders get a penny. Because those who own stock in a company take on more risk than those who lend money to the company, it's important that Teenvestors (see definition of Teenvestor) understand the basics of the stock market.

 

COMMON & PREFERRED STOCK

There are two basic types of stocks:

•    Common Stock. Owning common stock entitles you to a share of a company's profit if the company decides to distribute those earnings by paying dividends. Common stock¬holders can also vote to determine a company's leadership and they can get a piece of the company’s remaining value if it ever has to be sold due to bankruptcy.

•    Preferred Stock. Preferred stock generally pays a fixed rate of dividends. More important, the preferred stock dividends must be paid before common stockholders get their dividends. Because pre-ferred stockholders get fixed dividends, they are not entitled to a larger share of the profits if the company does extremely well. On the other hand, they are taking on less risk because, if the company does poorly, they still get paid dividends before the common stockholders.

 

COMPANY SIZE
One of the ways investors classify companies is by size. The size of a com¬pany is important to investors because big companies are generally consid¬ered less risky (for example, safer) than tiny companies. This is because, as a rule of thumb, the value of the stock of a big company does not move up and down as quickly as the value of the stock of a small company. In addition, the profits of big companies generally don't grow or shrink as fast as the profits of small companies.

The size of a company is measured by its market capitalization, or market cap, as it is commonly known. Market cap is the total market value of a company's outstanding stock and it can be calculated as follows:

Market Cap = Price per Share * Number of Common Shares Outstanding

Market caps are classified in four main categories: large-caps, mid-caps, small-caps, and micro-caps. We recommend that Teenvestors invest in large-cap and mid-cap stocks—at least for your first few stock purchases. For example, General Electric stock is considered a large-cap stock. At the time of this writing, the market cap of General Electric was about $262 billion. 


WHERE TO GET STOCK INFORMATION
Teenvestors can get information about companies at several sites. We usually reference the following sites:

http://www.finance.yahoo.com

http://www.marketwatch.com

http://www.money.msn.com

http://www.morningstar.com

http://www.fool.com

You can get information about stock prices, market capitalization, and other information about companies through these sites. 

 

TO BE CONTINUED IN PART 2, COMING SOON

 

Basic Business Concept: The Time Value of Money

Basic Business Concept: The Time Value of Money

 

Author: Emmanuel Modu ( eumodu@gmail.com )

The time value of money is a very important business concept. The application of this idea is what determines your parents' monthly mortgage, car loan payment, or installment loan payments. It also has an effect on the price of stocks.

Time value of money simply says that a dollar received today is worth more than a dollar received in one day, one month, or a year because the dollar received today can start earning interest immediately. It is such a simple idea that you probably already know it, but you just 
haven't thought about how it can affect your actions. Let's consider an example of how this idea can be applied.

Suppose someone told you that you can have $100,000 today or you can have $105,000 a year from now (assuming you have no immediate need for the money). Which would you prefer?

You cannot really answer this question until we supply you with one more piece of information: the interest you can earn in one year by putting the $100,000 in an alternate investment such as a bank account. You can easily answer the question if you know that you can put the $100,000 you'd receive today, in a bank account paying 10% yearly compound interest.

Think about the choices again: receive $100,000 today or receive $105,000 one year from now. For those of you who would rather have the $105,000 one year from now, you would have cheated yourself out of $5,000. And here is how.

If you collect $100,000 today, you can deposit it in the bank and earn 10% interest for the year, or $10,000 ( = 10% of $100,000), on that money. In one year, you would have a principal and interest total of $110,000. This is $5,000 more than you would get if you'd opted to receive $105,000 one year in the future.

Let's be a bit more precise in our calculations and use the proper terms for the analysis. In business school, the $110,000 you would earn in the future based on the 10% interest rate is called the Future Value. The $100,000 you are offered today to forego the Future Value is called the Present Value. The equation to go from the Present Value to the Future Value is as follows:

Future Value = (Present Value) + (Present Value) x (Return On Investment)

Future Value = ($100,000) + ($100,000) * (10%) = $110,000

If we told you that you can have $100,000 today or $110,000 one year from now, both choices are equivalent because the extra $10,000 we would give you one year from now exactly equals the amount of money you can earn by investing $100,000 in the bank for one year. Therefore you should demand more that $110,000 a year from now in order to make out better in the deal. 

This time value of money idea means that if you have a choice of receiving money today or a year from now, the money you should expect a year from now (by investing the money you received today) should be higher than the money you are offered today.

Turning the situation around a bit, suppose someone told you that you are eligible to receive $100,000 one year from now. At the same time, she asks you how much money you'd require today such that you'd give up the $100,000 money you can receive in a year? Once again, this would depend on how much you can earn by investing the money you would be getting today for one year. Let's go through the numbers.

Assume again that the interest rate you can get by putting your money in a bank is 10% yearly compound rate. The question you have to ask yourself is this: how much will I have to put in a bank account which pays 10% yearly compound interest such that at the end of one year I'd have $100,000 or more? We begin with our Future Value equation:

Future Value = (Present Value) + (Present Value) x (Return On Investment)


What we are trying to figure out in the equation above is Present Value—how much you would need today such that if you invest it, you would end up with $100,000 in a year. We can easily solve the equation using basic math in the following steps:

 Future Value = (Present Value) + (Present Value) x (Return On Investment)

Future Value = Present Value * (1 + Return On Investment)

Present Value = Future Value / (1 + Return On Investment)

Substituting the numbers in our example, we get the following equation:

Present Value = $100,000 / (1 +10%) = $100,000/(1 + .1) = $100,000 /1.1

Present Value = $90,909.09


Remember the original question: how much cash would you require today such that you would forgo $100,000 one year from now? As you can see from the formula above, the answer is that you should require more than $90,909.09 today if you can invest the money you receive today at an investment that would earn you a 10% return. We can prove this.

With exactly $90,909.09 on hand today (Present Value), you could put it in a bank account earning 10% per year. The total amount of money you would have in one year if you invest this money in the bank (Future Value) would be calculated as follows:


Future Value = $90,909.09 + ($90,909.09) x (10%)

Future Value = $90,909.09 + $9090.909 = $100,000

So if you received exactly $90,909.09 today, it would be exactly the same as receiving $100,000 one year from now if you could invest the money you received in a bank account earning 10% interest.

However, if you receive anything more than $90,909.09, you will be better off taking the money today. Let's assume that you were offered $93,000 today (the Present Value) versus receiving $100,000 a year from now (the Future Value). The future value of the $93,000 would be as follows. 

Future Value = Present Value * (1 + Return On Investment)

Future Value = $93,000 * (1 + 10%) 

Future Value = $93,000 * (1.1) = $102,300

So if you received exactly $93,000 today, you should take it instead of receiving $100,000 a year from now if you can earn 10% interest on the $93,000 because you will end up with $102,300 instead.

Therefore, you should always take the deal if you receive any amount over $90,909.09 in the scenario we just described.

Things get slightly more complicated if the investment period is multiple years versus our one-year example but we will save this for another time.

The Meaning of Beta

The risk of stocks has a special name in the world of finance--beta. The simplified explanation of beta is that it tells you how the value of a stock moves up and down with an index like the S&P 500. You don't really have to know how it is calculated but knowing the beta for each stock gives you an idea of how risky it is.

If a stock has a beta of 1, it means that its value moves up and down by the same percentage as a market index like the S&P 500 moves up and down. A stock that moves with this index is said to have the same risk as the market. For example, if the S&P 500 index has a value of 5,000 today and moves to 5,500 tomorrow, this represents a 10% increase. If the stock of company XYZ has a beta of 1, you would roughly expect its value to also increase by approximately 10%.

A stock with a beta of 1 is not really considered risky when compared with the overall stock market. A stock with a beta of, say, 2 means that each time the S&P Index moves up by 10% or so, the stock of company XYZ moves up by 2 x 10% = 20%. It also means that this same stock can move down 20% in value as well. So in general, high beta stocks are riskier than low beta stocks. But some people like risk because, even though they can lose a lot of money, they can also win a lot if the market goes their way.

You can find the beta of stocks through financial websites such as Finance.Yahoo.com. By entering a stock symbol, you will get data about the stock price, trading volume, and other  market information. The two images below are the information about General Motors, and News Corporation (the company that owns Fox News and the Wall Street Journal). Note that the beta of General Motors is 1.78 while that of News Corporation is about 1.00.

 



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