Learning about the stock market as a teenager

18, Mar - BLOG

Although teens can't open a brokerage account until they're 18, they nonetheless have two things they can use to thrive in the stock market: access to a wealth of information... and lots of free time.

Talk to any financial expert, and he or she will tell you that the younger generation has never had more valuable tools to learn about investing in the stock market than they do today. In addition to brokerage services offered by major financial institutions, there are Wealthsimple, Questrade, Finder and many other platforms that provide plenty of investment advice.

Young people are passionate about social media. They are connected, switched on and especially love the success stories they can follow online. Thanks to technology, they have a limitless speed of information that their parents didn't have at their age.

But the biggest advantage for the current generation is the time they have to grow their investments. The earlier they start investing, the more savings they will have when they retire. For this thirty-year-old young man, who was introduced to investing in the stock market by his father at age 12, the compound interest calculator is one of the best tools to clearly illustrate the priceless privilege of time.

According to bourse101.com, which has such a calculator, a person who invests a hundred dollars a month from the beginning of high school in various investments that yield an average annual return of 5 percent will have more than $312,000 in capital by age 65. That's nearly three times the capital ($113,500) that someone who starts investing the same $100 a month at age 30 would have.

Basic rules of initiation

Of course, these funds are not enough. Teenagers must be interested in investing. Interest in the world of the stock market doesn't arise instantly. But if the knowledge is imparted by the older generation to the younger one, it will definitely come in handy in adulthood. Over the years of education, an investment reflex will develop. And as a consequence, very early will realize that it is not worth squandering the money received.

It is better not to spend the money received on gifts, but to buy shares of banks, energy and telecommunication companies.

Teachers who teach finance recognize that introducing teenagers to investing is not an easy task. At this stage in life, most young people have other concerns than making their money work for them. Plus, the nature of the investment world is very dynamic and volatile.

This can cause a lot of anxiety for a teenager. However, there are always at least a few people in every class who take a keen interest in investing. Their questions and enthusiasm are quickly transferred to the vast majority of the class.

This is what prompted Professor Burstad to develop a special platform for students. He initially introduced it as a stock market modeling tool and then turned it into a contest open to all young people in high schools. With a dummy $200,000, participants were asked to buy and sell stocks, bonds, options and other financial instruments for nine weeks. In 2022, nearly 2,400 young people, more than 60 percent of whom were high school students, participated in the training on this platform.

Case studies are another important aspect of the training. The increase in young people's interest in investing comes from exposure to major companies that are part of their daily lives, such as Apple (AAPL, US$150.94), Netflix (NFLX, US$290.97), Dollarama (DOL, $80.29) or Canadian Tire (CTC.A, $148.27). The first step in learning how to invest is to understand how our consumption of products affects the behavior of these companies in the markets.

Of course, these new investors need to be taught that this is a calculated risk investment. It's not a lottery or a casino. Although the markets have never had long negative periods, every investor needs to do their homework to avoid adverse situations.

Parental Support

Since a teenager cannot open a brokerage account until he or she is of legal age, Mom or Dad can do it for him or her. And it is up to the parents to approve and purchase the securities to be held in the account.

From a tax perspective, the first $14,398 of annual income is tax-free. Thus, a child with no income other than investment income (interest, dividends, and capital gains) will not pay tax if the investment income does not exceed $14,398.

As long as the parents can prove that the contributions to the account are actually made by the child, the investment income is considered income to the child. Otherwise, under tax law, the parent must report said income, interest and dividends on his or her own tax return and pay the appropriate contributions.

When the child reaches the age of majority, he or she may transfer the assets to a brokerage account in the form of an RRSP or TFSA, depending on the contributions available, and continue to invest independently.

Parents can also use a Registered Education Savings Plan (RESP) to introduce their child to investing in the stock market because they can contribute to the plan. This option is all the more attractive because both levels of government will add a cumulative amount of up to 30% of the first $2,500 contributed each year until the year the child turns 17. However, total contributions cannot exceed $50,000. The RESP can be used to pay for the child's post-secondary education, and the child is responsible for the grant tax and investment income when the funds are withdrawn.