If you are a high schooler interested in learning more about the stock market, you are in luck! In the information age there are so many resources at your fingertips to get you started. First, you will want to understand some of the basic language – this will make it easier to learn the underlying concepts and communicate ideas and strategies. Once you get some of the lingo down and are comfortable with the basics of the stock market, it’s time to keep learning and improving your skills and knowledge!
Why High Schoolers Should Learn the Basics of the Stock Market
Even for those not aspiring to become a stock trader or broker, understanding stocks can be an incredibly helpful skill. These basics will be applicable for the rest of your life: from helping you manage your personal money to helping set your children on the right path. For example, most 401(k)s are invested in some type of stocks and mutual funds and, as we will touch on later, the earlier you start investing, the more that money can work for you! Additionally, if you are interested in a career in Finance, these principles will be applicable; any job in finance would require an understanding of basics of the stock market.
Here are a few basic stock market terms that you should know:
Stocks – formal ownership of a share of a corporation. They can also be called ‘equities.’
Shareholder Meetings – These bring together anyone owning stock in the company with company leadership to elect new leadership and vote on any big decision – if you own Common stock in a company, you do not have to be present at the meetings, which are usually Annually – you can usually vote either by mail or online.
Mutual Fund – this is a collection of investments that is bundled together – this helps diversify your holdings. If you own one stock and that company goes out of business, you lose all of your money. If you own a mutual fund that owns 500 different stocks and that company goes out of business, it is barely going to impact your bottom line.
Index – these are groups of stocks that are clumped together in order to better track the overall market. The most popular in the US are the S&P 500 and the Dow Jones Industrial Average.
Exchanges – this is a marketplace where stocks are bought and sold. The most famous in the US are the New York Stock Exchange (NYSE) and the NASDAQ, but there are many more.
Stock Broker – the intermediary between the buyer and seller that effectuates the sale of stock. There are people that do this, however, with the rise of technology, most people choose to use an online brokerage account that will make trades for them. Brokers make a commission for helping execute the trade.
What are Stocks?
Let’s start here: what are stocks? Stocks are a formal ownership of a share of a corporation. If you own a stock, you aren’t an employee, CEO or even a direct owner of the company, however, you will be entitled to vote at shareholder meetings (for common stock, but that is a topic for another day) which could give you a small impact on the company’s trajectory. What is paramount to most investors, however, is that you are eligible to receive any dividend payments and you have the right to sell your share of ownership to another person if you desire.
What is the Stock Market?
While the reality is a little more complex, the stock market is essentially just a marketplace – this is where buyers and sellers of a specific stock agree on a price at which the equity should be exchanged. With the rise of technology, this is usually done through an electronic broker that pairs up a buyer and seller and helps them agree on a price. It is out of sight – if you want to purchase a stock, you can go to one of a multitude of online brokers, such as Fidelity or Etrade, set up an account, and buy a stock by just inputting the number of shares and the stock you would like and accepting the asking price.
Why Would Anyone Want to Trade or Purchase Stocks?
Recap - stocks are a claim of ownership on a part of a company that can be bought and sold in the stock market through a stock broker.
So, why do people do this? The short answer is that people engage in trading equities in order to make a profit. There are a couple of basic ways to do this:
- Selling a share of stock at a higher price than you purchased it for: Let’s say you have 1 share of stock worth $100. The company is doing well, so more people want to own the stock. If the bid price rises to $150 and you sell the stock, you would have made a profit of $50 (less any commissions and taxes).
- Note: Now may be a good time to also point out the flip-side. There is risk involved with equities. If you buy a stock there is the possibility that it will go down in value and, at worst, if the company were to go bankrupt, you may lose the entirety of the invested amount.
- Dividends: Some (not all) companies choose to share profits directly with their shareholders. Typically, this is done quarterly or annually. Example: You have 1 share of stock worth $100 and the company decides to pay out an annual dividend of $2; you profit $2. If you choose to re-invest your dividend and use that $2 to buy more stock, however, you can start to get compounding growth.
Compounding Growth – This is one of our favorite financial tips ever! Compounding Growth is when the growth or interest you make from an investment grows its own profits! For example, if you had a $100 investment that made 10% every year, you would have $110 after year 1. But, after year two, that $10 of profit from your first year would ALSO make 10%, so you would make an extra dollar. In this example, that sounds trivial, but as time grows, so does the money; exponentially.
Following this example, let’s say two people made this $100 investment. Sheryl chose to keep her profits invested to get compounding growth. John took the $10 in profit every year and left just the $100 invested. At the end of 10 years, John would have made $100 in profit – not bad, right? Well, Sheryl would have made almost $300!
This is why investing at a young age is so beneficial – the earlier you start investing the more you can harness the power of compounding interest and ultimately, the less money you need to invest out of your pocket. If you don’t believe us, take a look at this chart.
Is all Investing Done in the Stock Market?
While owning and trading stocks are a type of investment, not all investments are in stocks. There are many additional places in which people invest, usually to increase diversification. One of the benefits of diversifying a portfolio is to balance your risk. Stocks for example, may offer the potential of a higher return, but may be riskier than other options, such as an insured Money Market Account. Another example would be during a broad stock market decline – while stocks may be losing value, fixed return investments will continue to return profits. Here are a few, but by no means exhaustive list, other popular investments:
- Bonds – An IOU from a business or government – interest is paid out to the bond holder until you are paid back. Think of it this way: you are loaning them your money – in turn, they pay interest on the loan.
- Treasury Bills – T-Bills are a way for the government to raise money – they are sold at a discount to the face-value of the bill, but when the maturity (usually a couple months to one year) is met, you can redeem them for the full face-value.
- Money Market Accounts – Savings account that usually returns a higher interest rate. This is because the bank has less restrictions with how they can use your money. They tend to have higher minimum deposits and minimum account amounts.
- Certificate of Deposits (CDs) – This is a savings account where the borrowing institution pays an interest rate to the depositor when the money is held for a predetermined term (usually between a few months and 5 years). The longer the term you leave your money in for, the higher the interest rate. These tend to pay a higher interest rates than a traditional savings account, but you need to plan ahead because there are penalties to pulling out your money before the end of the term.
Continuing Stock Market Education for High Schoolers
This blog is barely scratching the surface of the art and business of trading equities. Fortunately, there are more resources than ever for high schoolers to continue to deepen their knowledge and even start getting some practice:
- There are a myriad of online blogs and sites to learn from
- Attend a summer camp
- Many high-schools offer investing elective classes
- Enroll in Finance or Investing classes at your local community college
JKCP Summer Stock Market Class
As part of our Enrichment summer programs for high school students, JKCP offers a Stock Market Trading class. This course examines essentials of investing and trading such as dividends, stock splits, Initial Purchase Offerings, the NASDAQ and NYSE. In order to make the learning more fun and experiential, students will develop some of these skills and topics through the week-long stock market competition, analyzing brokerage accounts and individual portfolios, and other tools and software to get high school students started. The goal is to create a solid foundation for further stock market trading by including necessary investment, trading and financial information that will give students the full picture. If this course sounds amazing, you may also be interested in our two-week, intensive Business School as well!