For many teens and young adults, investing in the stock market is an exciting opportunity to build wealth. However, most brokerages require you to be at least 18 years old before you can open your own investment account. This leaves many eager young investors wondering – what is the legal age to start trading stocks?
The short answer is 18 years old for a standard, independent investment account. However, with the help of a parent or legal guardian, those under 18 can begin investing in certain custodial accounts.
While patience and guidance from elders are required, investing early allows teens to take full advantage of the power of compound interest. The extra years for investment growth can ultimately mean accumulating significantly higher asset values down the road.
Why Start Investing Early?
Investing isn’t just something to think about when you start working. Beginning the journey in your teen years sets you up for financial success through the power of compound interest and time in the market.
The Power of Compounding Interest
Compounding interest is when the interest earned gets reinvested to generate additional interest on itself over time. Essentially, your interest begins earning interest!
Over long periods, compounding can rapidly accelerate growth. Even starting small, compounding effects will build exponential returns.
For example, investing just $2,000 at age 18 and earning a 10% annual return would grow to over $210,000 by age 65. But waiting until age 30 would yield only around $115,000 despite higher total contributions.
Teens have the benefit of time to allow compound growth to work its magic over decades. The earlier the start, the more profound the eventual results.
Time in the Market Beats Timing the Market
Legendary investor Warren Buffet famously said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
This sums up the benefits of long-term investing. Over decades, ups and downs in market cycles smooth out. Maintaining positions without reactionary selling allows share prices to recover.
Short term price volatility scares many new investors. But teens starting early have the advantage of decades ahead to ride out temporary declines until recovery.
READ ALSO: 10 Stocks Primed for Day Trading Profits in 2024
Opening Your First Account at 18
At age 18, teens can open accounts on their own and enjoy full independence over their investment choices. However, first-time investors should start small and simple until they establish confidence and experience.
Choose an Online Brokerage
With thousands of available stocks and funds, sifting through everything is daunting. Online brokerages are the easiest way to invest. Accounts can be opened quickly, and money can be moved between your bank and investment account electronically.
Leading discount brokers include:
- Fidelity
- Charles Schwab
- TD Ameritrade
Focus on minimal account fees and zero-commission trades when comparing brokerages. Many restrict advanced options for new clients, but overall functionality is very similar.
Fund Your Account
Once accounts are opened, deposit money to fund investments. Many brokers allow electronic linking for convenient transfers between accounts. Slow, consistent deposits allow for taking advantage of dollar-cost averaging.
Remember, investing should never sacrifice your essential needs and emergency savings. Only invest what you can responsibly afford to not touch for many years. Patience avoids selling at the wrong times.
Make Your First Trade
Now comes the exciting part – making your first real investment! But don’t let the allure of hot trends and flashy stocks tempt you. Start simple.
Index-based exchange traded funds (ETFs) tracking major market benchmarks like the S&P 500 or the total US stock market are smart building blocks suited for new investors.
Examples include SPY, VTI, and ITOT. These provide instant diversification across hundreds of stocks with one purchase.
Stick to the principles of broad diversification and minimizing fees early on. As experience grows over years, revisiting the approach periodically is wise.
Starting Under Age 18
While 18 is the minimum for independent investing, minors can begin under adult supervision. Custodial accounts provide the solution.
Custodial Account Basics
Custodial accounts have two account owners – one primary holder and one custodian. The custodian manages account actions on behalf of the primary holder until legal adulthood is reached. Parents or guardians often fill the custodian role for minors.
Assets technically belong to the minor from the start for their exclusive use and benefit. But the custodian makes supervision and guidance possible during the learning years until greater maturity and independence are attained.
Upon reaching age 18 in most states, full unilateral control transfers to the primary account holder. No further action is needed as the switch is automatic per the custodial agreement’s termination conditions.
Types of Custodial Accounts
The most common custody account structures used by brokerages are:
- UTMA – Uniform Transfer to Minors Act
- UGMA – Uniform Gift to Minors Act
Both UTMA and UGMA function very similarly in practice – the distinction is more technical relating to account funding and asset withdrawal procedures. For practical purposes, teens can invest identically through either model with no restrictions beyond the custodian’s discretion.
In addition to basic taxable custodial brokerage accounts, specialized accounts exist for retirement and education goals:
- Custodial Roth IRA – Funded by earned income from teen jobs
- 529 College Savings Plan – Tax advantaged for future university expenses
Each account type has specific intended usage, so consider needs when choosing the right custodial setup.
Choosing a Custodial Broker
All major brokerages offer custodial account options, with most allowing openings online or via forms. This includes big names like:
- Fidelity
- Charles Schwab
- TD Ameritrade
- E*TRADE
Compare account minimums, monthly fees, and commissions when evaluating providers, as cost directly reduces net returns.
Also, consider the availability of fractional share trading. This allows buying part of a share, enabling investing in expensive stocks like Amazon even with minimal funds.
Investing in Custodial Accounts
Once accounts are open, investment options are broad. The custodian retains oversight authority to approve or decline teen requests, but involvement levels vary. Some custodians take a hands-off approach, allowing the minor to self direct within reason. Others maintain veto rights on all investment decisions.
Communication is key, so expectations are aligned. Investment goals, risk tolerance, and responsibilities should be discussed early. But developing habits around long term consistent investments should be the priority.
If given latitude, individual stocks relevant to teen interests allow them to connect with brands they know. However, index funds and ETFs remain smart building blocks for beginners.
No matter the investments chosen, custodial accounts give those under 18 a valuable head start on investing.
Turning 18 and Account Transfers
Reaching age 18 brings some changes, but the transition is mostly invisible behind the scenes. Here is what to expect:
- Legal account ownership transfers fully to teen’s name
- Teens take sole control, with custodian supervision ending
- Some account data may need updating, like tax ID numbers
- Added responsibility making new withdrawals and trades
Essentially, age 18 simply flips the switch from custodian oversight to unilateral control by the primary account owner. This transfer of independence happens automatically based on the birthdate records associated with the account.
New adults should login to their independent account when turning 18 to make desired updates, like adjusting listed beneficiaries. But otherwise, portfolio changes are optional – holdings can remain invested as-is.
The key shift is the move to sole legal responsibility for investment decisions and taxes. So further learning should continue as maturity in money management develops.
To Recap
While impatience is understandably common among eager young investors, know that beginning too aggressively too early can backfire. Patience in developing knowledge foundations serves long term investors well by avoiding impulse mistakes.
Custodial accounts allow controlled involvement under the guidance of trusted adults. Whether learning through dummy practice portfolios or directly participating alongside a custodian, early exposure builds critical habits.
Time is the most valuable asset for young investors. Gaining experience early allows compounding to work its magic over many decades. Even small, consistent investments can yield great fortunes down the road.
The legal minimum age may be 18, but with custodial oversight, investing can start much sooner to maximize time and compound interest.
FAQ
At what age can I start trading stocks?
The minimum legal age to independently open investment accounts and trade stocks is 18 years old in the United States. However, with adult supervision, those under 18 can begin investing in custodial accounts on their behalf.
Can a 16 year old invest in stocks?
A 16-year old cannot invest in the stock market on their own directly, but parents and legal guardians can open custodial brokerage accounts on a minor’s behalf to allow investing under adult oversight. Assets in custodial accounts technically belong to the minor.
What can a 17 year old invest in?
A 17-year old still requires adult custodial accounts to invest, but this provides access to normal securities like stocks, bonds, mutual funds, and ETFs that are identical to standard investment accounts. Good starter assets include fractional shares of brand-name stocks, index mutual funds, and retirement target date funds.
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