The concept of investing can feel overwhelming if you're just getting started. Questions you may have could range from broad and general (for example, "What is investing?" "How do I start?" "When can I start?") to more specific ("What are my investment options in Canada?" “How do I know which investment choices might be right for me?").

For many teenagers, feeling unfamiliar with investing can often be attributed simply to age or stage of life. When you're younger, there may be a tendency to think that investing is solely for adults and individuals who are more settled in their careers or who have a lot of money to invest. However, as Noah Booth, a youth author, importantly shares in his book, A Rich Future: Essential Financial Concepts for Youth , “young people can invest their money and take advantage of the potential opportunity to grow it."

RBC Wealth Management Canada caught up with Booth to get his thoughts on four questions every teenager should be asking to build their investing knowledge.

1. What is investing?

Investing is using money or putting money to work, with the goal of making a profit. In his book, Booth describes investing as “a way to make your hard-earned money work for you."

There are different types of investments and investment vehicles. Some common examples include guaranteed investment certificates (GICs), stocks, bonds, mutual funds and exchange traded funds (ETFs).

When you invest your money, it can grow over time. However, it's important to recognize that most investments move up and down in value, and every investment comes with a certain degree of risk.

“For young people, even though you may not have much in the way of savings, getting started with investing is a way to help build your savings," shares Booth. “Even if you invest a small amount, that can make a big difference to your savings over the years."

2. Why should teens start thinking about the possible benefits of investing early?

For teenagers, short-term financial needs and wants are often more top of mind than long-term savings. And during your teen years or as you take on greater financial independence, it may seem challenging to set additional funds aside to invest and build savings. Regardless of your situation, it's important to make the connection between an early start to investing and the potential for positive long-term impacts, because time is your biggest asset.

Why is that? “It comes down to the importance of compound interest  and how that may impact your investments over time," Booth explains.

In general with investments, interest can be calculated in two ways: simple and compound. With compound interest, the investment earns interest not only on your original investment amount (called the principal amount), but also on the interest that gets accumulated along the way. As interest is earned and gets reinvested, “the compounding effect means the longer the money stays invested, the faster your savings can grow," says Booth. “And that means the earlier you start with this type of investing, the more time your money will have to grow and compound."

3. What is investment risk?

Booth says he learned early on that there are different types of risk.

“Risk, for me, is the possibility that you could lose some money when you invest it," he says. “It impacts the decisions you make, based on how much you need the money and how much risk you're willing to take for the possibility of a profit."

An investment that might carry too much risk for you could be fine for someone else, and vice versa. This is where risk tolerance and capacity for risk—and the importance of establishing your investor profile—come into play. A key, Booth says, is to “diversify your investments; and, if you're putting your money into something that could be more risky, it's important to consider your comfort level with, and ability to take on, that type of risk."

4. Why is diversification important?

Diversifying your investments is an approach to manage risk and involves putting your money into many different types of investments.

“Diversification lowers your risk by having your money spread out, compared to having it all in one company, sector or industry," Booth says.

When your investments are diversified, if one investment goes down, for example, the overall impact likely won't be as significant compared to if you were invested fully in one type. With diversification, you're exposed to smaller amounts of different types of risk across your investment portfolio.

A final word

“As a young person learning about investing, or as you're getting started, I think it's really important to take a lot of time to do research and build your knowledge through reputable resources," Booth says. “Talking with a qualified professional is a key part of that as well."

Working with a qualified advisor may help inform you about investment options and may ensure aspects such as your risk profile, time horizon, and your short-term and long-term financial goals are being defined and factored in as part of decision-making.

And as Booth himself has learned in pursuing his interest in personal finance, whether it's investing or other areas of financial management, “building knowledge and establishing good financial habits early on can have a positive impact in your life over the long-term."

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Note: Securities or investment strategies may not be suitable for everyone. Consult with a qualified advisor when planning your investment strategy. Interest rates, market conditions, tax rules, and other investment factors are subject to change.

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In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.