This article is reprinted by permission from NextAvenue.org.
Earlier this year saw a frenzy in “meme stocks” like GameStop
You’ll remember: speculators — many of them in their 20s and 30s — clamored to buy shares, sometimes with borrowed funds, based on tips they’d heard, only to see those stocks plummet after soaring. More recently, we’ve seen similar wild rides in stocks of cryptocurrencies, like Dogecoin
Controversy over this kind of trading has ensued, resulting in media analysis and even a Congressional hearing publicizing the perils of options trading for young adults oblivious to the risk involved.
If you’re a parent of a 20-something or 30-something, it’s time to have a conversation with your child about the stock market.
What should you say? Here are seven suggestions:
1. There’s a critical distinction between speculating and investing. Learning this can make the difference between being stunned by big losses and eventually deriving substantial value from a well-constructed portfolio.
Buying stocks because of tweets or postings on social media forums, such as Reddit’s WallStreetBets, amounts to following the herd — a recipe for likely disaster. Investing isn’t about acting on tips. Rather, it involves the hard work of learning about how to assess the quality of companies and their fundamentals and then doing the necessary research before investing.
For many, this kind of research can be tedious, but it can pay off over the long term.
Above all, sound investing means learning about managing risk with caution, prudence and patience.
2. Getting good investment returns isn’t easy or quick. It takes time and patience. Rapid rewards never come without high risk. Tell your child that if he or she puts a lot of cash into one or a few stocks (usually not a good idea), they shouldn’t invest more than they can afford to lose.
Related: Teach your kid the magic of compounding so they can retire rich
3. Options aren’t for beginners. When you buy a stock option, you’re purchasing a contract giving you the right to buy or sell a stock at a certain price on or before a specific date. An option can result in a total loss of what you paid for it.
Even many knowledgeable, experienced investors are reluctant to get into options trading, because the considerable risk involved demands much more time and attention than they’re willing to devote.
See: The most frequently asked questions by Robinhood traders reveal ‘new type of uninformed equity-market participant’
All too often, unwary individual investors trading options fall prey to professionals, including hedge-fund managers engaging in short selling (that’s a bet that a stock will fall in value and done by borrowing share, selling them and buying the stock back). When beginning investors attempt short selling, outcomes can be devastating. They’re often unaware that while the upside is limited, the downside can be virtually unlimited.
4. Options trading isn’t actually investing. Rather, it’s a form of speculation based on marketing timing — betting on whether a stock will rise or fall in value within a set period. In options, unlike actual stock investing, value doesn’t accrue. Some investors profit to the extent that others err, making this a zero-sum game.
Try: MarketWatch’s Virtual Stock Exchange, a free stock market game with community trading discussion
5. Trading platforms like Robinhood offer advantages that enable young people with limited investment capital opportunities to get into the market, including the opportunity to buy fractional shares. This provides them a way to construct portfolios that may include pricey stocks.
6. Disregard tips and the investing herd. This means: don’t buy stocks based on what you read on social media or anywhere else because they’re “hot.”
Often, rumor-driven investment chatter is started by owners of stocks seeking to execute what’s known as a “pump-and-dump” scheme — promoting a stock’s value so they can then quickly dump it at profit before shares decline. Buzz is often a good reason to stay away from a stock.
7. Keep your emotions out of investing. Getting emotional often leads to errors. Instead, investment decisions should be made dispassionately.
Learning about investing is challenging and, for many, can be tedious. But, coupled with a disciplined investing process, the hard work can pay off — not overnight, but in the long run.
David Robinson is a Certified Financial Planner and founder/CEO of RTS Private Wealth Management in Phoenix.
This article is reprinted by permission from NextAvenue.org, © 2021 Twin Cities Public Television, Inc. All rights reserved.
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