This year, Robinhood and its more than a million average customers have found themselves at the center of attention that are both comical and tragic.
“Robinhood: ‘Now We Allow Teens to Trade Stocks with Their Parents’ Credit Cards” became an April headline on the satirical site Stonk Market. Two months later, the headlines were far more scorched, after a 20-year-old man killed himself, leaving behind a note about his negative Robinhood balance.
Robinhood customers trade fast – often in particularly volatile types of investments – and can lose very quickly, as my colleague Nathaniel Popper reported in July. Customers have gone to its headquarters to complain, and the company has installed bulletproof glass.
All parents are afraid of this activity, and with good reason. But only a few shares of the company’s stock are owned by others, and this should not ruin or swallow bad investment habits. This can be the way to build really good people.
Learning about financial risk can be challenging for children whose families have never faced financial hardship. Nevertheless, this is an important lesson.
For most people, the best way to save enough for retirement is to start early, invest early in most stocks and stay fit for half a century. When the market picks up or when it decreases rapidly, it can lead to poor decisions. The former experiences that instability and learns how to react to it, the better.
What are we talking about when we talk about risk? Morgan Houseall explains in her fascinating new book, “The Psychology of Money”: Any goal worth pursuing in life will almost always come with chances of success that are less than 100 percent. “Risk is just that when you end up on the unfortunate side of that equation,” he writes.
The challenge for any investor is to find out if any such failure is due to bad luck or poor skill. Solving for that equation – and, hopefully, developing some humility as a result – is a lifelong discovery.
Why stock for teenagers? They regularly score-keeping and are likely to experience little real pain when steak is low when they manage large amounts of money. Correct the proper railings, and stocks can teach valuable lessons to the emerging adults in your life.
If you are under 18, you cannot have your brokerage account and trade without supervision.
It may be tempting to open and trade a regular account with your children, but a better option might be a custodial account, set for an adult who is not yet 18 years old. This can come with lower taxes on any benefit, although the overall balance is subject to the calculation of college financial aid examiners.
Ask questions about trading commissions, account fees and any minimum balance requirements. Also, inquire about whether you can buy fractional shares of individual shares that may have higher values for a single share.
There are some guidelines that you need to establish as a parent, relative or mentor. Stick to the basics for the first few years, which means that there are no short sales, options, or use of debt to buy on margin.
Then there are the rules of firms, which adults sometimes ignore. Charles Schwab, Fidelity, and TD Ameritrade were very unanimous in this pledge: Do not give account passwords to children so they can trade on their own. And if you do, don’t come to us for help if they make some gonzo condition that doesn’t work.
Robinhood, which does not offer custodial accounts, does not want to assign passwords to anyone. A spokesperson declined to comment on how often it needed to close accounts because people under 18 had somehow managed to trade.
Skin in the game
Like so many newbie investors in the 1990s, I was set on a straight path by the columns of The Wall Street Journal’s Jonathan Clements, who used their children as guinea pigs in delightful ways.
In an interview this week, he reminded me of a failed exam, where he took out a small amount of money and then held a mutual-fund-picking contest. His son lost to both his father and his sister, but he did not get all that much from experience.
“They were given a bunch of chips and told to go and play,” said Mr. Clements, who is the author of “How to Think About Money” and now edits Humbledollar.com, “It doesn’t look like that.” Is that if you lose money, you will come empty handed at the end of the evening. “
Best, then, to get the children to invest the money they earned – so they can remember the toilet hours they spent to collect all of their little ones.
set a goal
In a jubilant Twitter exchange And in a follow-up article in June, Morningstar’s director of personal finance, Christine Benz, expressed serious reservations about buying individual stocks when she was a new investor. Those who invest in them, after all, do not earn much over time, putting their money only in a mutual or exchange-traded fund that owns scores of individual stocks. Why does Get-Go not invest in index funds?
Well, it can be boring. Also, teenagers in different stocks get to think about big economic forces: Why is this company outperforming the other? And dizziness losses that are more likely to occur with individual stocks can teach a valuable starting lesson.
When Ms. Benz and I chatted this week, we agreed: Any share investment should begin with defining the point of practice. And it also depends on the teenager.
“Really all I got was to achieve one goal,” Ms. Benz said. A short-term objective such as saving for a bicycle would have led him to take less investment risk, not more. He would avoid her personal stock.
Challenge their choice
17-year-old Coleen Roberts, and her teammates at McClay School in Tallahassee, Maca, were co-champions of the Wharton Global High School Investment Competition this year. But when he wants to buy the stock, he reports to the investment committee of one: his father.
Colin stated that David Roberts, a financial adviser, had to respond to the Northern Trust’s overlords once he was a mutual fund manager.
“If it’s not a good stock, then I’ll usually realize I’m pitching it,” he said. “When I’m explaining it, I’m exposing myself to problems.”
One aspect of the Teen Stock Ownership is the opposite.
Big benefits can make you feel invincible. This is now a real threat, given that some technology stocks have performed as of late.
Mr. Clements has a suggestion. Set the limit of profit in any share. Once at that point, sell enough to capture all the wins and put them in the original index fund.
Then you have an experiment, where the money you have left is closed compared to the new fund. The fund will invest in very small amounts from stocks, most likely. Hopefully it ends up being a better performer, reinforcing the lesson that diversifying your investment is a smart move and also creates less anxiety.
But even though single-stock gunling makes a net profit for a young investor, exposure to mutual funds will count for some. After all, they form the backbone of workplace retirement plans, and those funds are the best route for long-term financial security for most investors. Having a little stock should help young investors know what to do by the time they enter the working world.
“With any luck, it will trigger what makes them excited about investing and turn them into someone who invests in the stock market for the rest of their lives,” Mr. Clements said. “If you can do that, the payout is huge.”