Investing can be an excellent way for teens to secure their financial future. The earlier you start investing, the more time your money has to grow through the power of compound interest. However, most teens can’t open investment accounts on their own until they turn 18. Luckily, there are ways for teens under the age of 18 to start trading stocks with the help of a parent or guardian.
Why Teens Should Consider Investing
Investing early provides significant advantages:
- Time is on your side. The earlier you start investing, the longer your money can grow through compound interest. Even small, regular investments can add up to big money over several decades.
- You can afford more risk. When retirement is 40+ years away, teens can afford to take more risks and invest more aggressively for higher potential returns. As you near retirement, it’s wise to shift to more conservative investments.
- It teaches financial responsibility. Investing encourages teens to think critically about how to grow and manage money. These skills will serve them well throughout adulthood.
Consider this: a $2,000 investment in the S&P 500 index at age 18 could grow to over $150,000 by age 65, assuming a 10% average annual return. Waiting just five years, until age 23, drops that projection down to around $94,000.
How Can Teens Under 18 Invest?
Teens under 18 cannot open investment accounts on their own. Instead, they need a parent/guardian to open a custodial brokerage account on their behalf.
Types of Custodial Accounts
There are two main custodial account structures used by brokerages:
- UTMA (Uniform Transfers to Minors Act): The adult controls investments until age 18 or 21, depending on state.
- UGMA (Uniform Gifts to Minors Act): The adult controls investments until age 18 or 21, depending on state.
Both account types work similarly. The adult maintains control until the teen reaches the age of majority in their state. Then control automatically transfers to the teen. Parents can choose which account type to open when setting up the custodial relationship.
Finding a Brokerage for Custodial Accounts
Many major online brokerages offer custodial accounts, including:
- Fidelity
- Charles Schwab
- TD Ameritrade
- E*TRADE
- Interactive Brokers
Some factors to consider when choosing a custodial brokerage account are:
- Account minimums and monthly fees
- Trading commissions
- Educational resources for new investors
- Availability of fractional share investing
- Mobile app reviews
Fractional share investing allows the purchase of partial shares with as little as $1. This enables teens to invest in expensive stocks that they otherwise couldn’t afford.
How Teens Can Direct Investments
While parents/guardians maintain legal control until the teen turns 18 or 21, most will allow input from their teen on investment decisions. Here are some tips:
- Communicate investment goals & risk tolerance: Set expectations upfront so the teen and adult are aligned.
- Research together: Learn about stocks, funds, bonds, etc. Making decisions as a team encourages engagement.
- Start with small amounts: Don’t risk money you can’t afford to lose. Small amounts let teens experiment before committing more.
- Invest in what you know: Buying stock in brands and companies teens interact with helps spark interest.
- Use practice portfolios: Experiment risk-free with virtual investing platforms before putting real money on the line.
Setting goals and expectations early can help avoid future conflicts over investment decisions. Even if the parent/guardian retains final say, input from teens allows them to learn by doing.
What Can Teens Invest In?
Custodial accounts allow investments in most normal securities, including:
Stocks
Purchasing shares of public companies is a common first step for new teen investors. Recommendations:
- Individual stocks: Research and buy shares of companies you use or believe in.
- Fractional shares: Purchase part of a share if the full price is too high.
- Index ETFs: Offer diversification by owning many stocks within a market index.
- Practice first: Use virtual trading platforms to experiment before risking real money.
Owning fractional shares allows teens to invest as little as $1 in expensive stocks that would otherwise be unaffordable. Popular trading apps like Robinhood and Webull allow fractional share trading.
Mutual Funds
Mutual funds provide built-in diversification by pooling money from many investors to purchase a variety of assets. Key benefits:
- Professional management
- Variety of risk tolerances
- Low contribution minimums
- Automatic rebalancing
Index funds and target-date retirement funds are popular, low-cost options for new teen investors looking for diversified passive investments.
Bonds & CDs
Bonds and certificates of deposit (CDs) provide fixed income over time, making them lower-risk options.
- Bonds: Issue fixed interest payments until maturity date when principal is repaid. Government and corporate bonds are available.
- CDs: Like savings accounts but with guaranteed returns for committing to fixed terms. Penalty for early withdrawal.
- Lower risk than stocks but provide portfolio stability and income.
Bonds and CDs work well for conservative portions of teen investment portfolios needing less volatility.
Alternative Assets
Other securities teens may consider later as they gain experience:
- Options
- Futures contracts
- Foreign currency
- Cryptocurrency
- Real estate (REITs)
However, these tend to be higher risk and better suited for when teens have more investing experience.
Best Practices for Parents
Parents play a critical role in encouraging good investing habits. Consider these tips:
- Lead by example – Show teens investing discipline by walking the talk.
- Incentivize learning – Offer to match funds when teens invest their own earned income.
- Discuss mistakes – Don’t hide investing losses. Analyze errors made as learning moments.
- Encourage accountability – Require teens to track their investment performance over time.
- Celebrate wins – Praise good decisions just as much as discussing mistakes.
The custodial investing period allows parents to demonstrate good habits while letting teens learn in a supervised environment. Maintaining open and frequent conversations about progress creates teaching moments on both ups and downs.
Turning 18: What Changes?
Once a teen with a custodial account turns 18, here is what changes:
- The account automatically converts to a standard individual investing account in the teen’s name only.
- The teen takes over full control with sole legal ownership of the investments.
- The parent no longer has any account access or control without the teen’s authorization.
- A teen must provide their own tax ID number, such as Social Security Number.
- Standard beneficiary forms should be updated by teens.
Turning 18 simply flips a switch, transferring full account ownership, control, and independence to the teen. No action is required by the brokerage, but teens should login to their newly independent account when they turn 18 to make any desired account updates, like adjusting beneficiaries.
To Recap
While teens may not be able to open investment accounts completely independently, custodial accounts offer a supervised way to begin investing and learning money management skills. Starting early allows teens to take advantage of time in the markets to grow their money exponentially for the future through the power of compound interest. Even with small initial investments over 4+ decades, the difference starting early can make is profound.
Whether they invest $25 or $250, custodial accounts give teens a head start on adulthood by encouraging saving, goal setting and critical thinking around financial decisions. Parents can provide oversight while still allowing input from teens to let them feel a sense of ownership over the investments. Together, parents and teens can build communication, accountability, and confidence around personal finances in the teen years.
Investing for teens FAQs
Here are answers to some frequently asked questions teenagers and parents may have about teen investing.
How to invest $1,000 as a teenager?
Teens have time on their side and don’t have to be too aggressive. As little as $100 invested in the S&P 500 could be worth over $88,000 by retirement, assuming historical average returns. It’s okay to take some risks on stocks that personally interest you, but also invest in diverse index funds. Most importantly, don’t panic during market swings. Time smooths volatility over decades.
When can a teenager start investing?
The minimum age to open an independent investment account is usually 18 years old. However, teens under 18 can begin investing in a custodial account opened by a parent or guardian on the teen’s behalf. Parental involvement is required until the teen turns 18, at which point account ownership transfers fully to them.
How can I invest if I’m under 18?
If under 18, have a parent/guardian open a custodial account with a brokerage in your name. The adult manages the money on your behalf until you turn 18, at which point sole ownership transfers to you. Within the custodial account structure, many parents allow their teens to direct some or all investment decisions, like selecting stocks to purchase. Investing in your teens, even in small amounts, takes advantage of decades for that money to grow through compound interest.
A custodial account allows you to invest in the same securities as standard investment accounts, including stocks, bonds, mutual funds, ETFs, and more. Good custodial account options to explore with a parent include Fidelity, Charles Schwab, and TD Ameritrade. Focus on minimizing fees and expenses so more money goes to investments instead of the brokerage.
What can a minor invest in?
Within a custodial investment account set up by a parent or guardian, a minor has access to invest in most normal securities like stocks, bonds, mutual funds, and ETFs. Good starter investments for teens are fractional shares of stocks in brands they know and use, index-based ETFs tracking major markets like the S&P 500, and target date retirement mutual funds matched to your 18th birthday.
Some assets have age requirements, though, so options trading and margin trading may be restricted until age 18 or older. And speculative assets like cryptocurrencies are generally too volatile for inexperienced teen investors. Discuss your interests with your parents to determine suitable investments to focus on while under 18.
In another related article, What is the Legal Age to Start Trading Stocks?
