Can You Invest in the Stock Market Before You Turn 18?

Can You Invest in the Stock Market Before You Turn 18?

Before you turn 18, you can only make investments through a custodial account with the supervision of your parent or guardian. Your parent must sign up for a custodial account with you to invest as a minor. 

 

However, it’s never been easier for teens to start investing in stocks and other financial assets through a custodial account. As new, easier options become available, like no-fee stock trading, easy to use investment apps, and fractional shares, teens have more opportunity to start investing with small amounts and put their money to work. 

 

Investing in the stock market can be an effective way for you to help your child grow their savings. It makes sure that their money is always working hard for them. There is a risk that you may not get your initial investment back with stock market investments. However, as with most types of investing, stock market investments can offer significantly higher returns, especially over the long term. 

 

While stock markets can go down as well as up, the longer your money stays invested, the more time you'll have to recoup any losses and a better chance of making money. The earlier you begin investing on behalf of your child, the bigger the rewards they may enjoy later. 

 

Investing in the stock market could be a great way of setting your children up for future success by helping them learn about saving and the exciting benefits of investing their money. But how old do you have to be to invest? Read on to find out.

Benefits of learning to invest when your child is under 18

Kids who start investing as early as their teen years or younger have a significant advantage over their peers who wait to start investing. Time is the most valuable asset when it comes to investing, so even starting with small amounts from a young age can make a massive difference down the road. The US Securities and Exchange Commission explains how just $5 invested each week starting at age 18 could stack up to $134,000 or more saved by age 65. Teens who begin even younger can benefit from time and compound interest, building even more wealth with little effort.

What age can you start investing in the US?

In the US, your kids must be 18 years old to legally open an investment account or buy stocks on their own. They can’t have their own investment account until they’re a legal adult, which is 18 in the US. Can you invest under 18? Yes. There are still plenty of ways to learn how to invest under 18, but a parent or guardian has to open an account legally on their behalf, called a custodial account, and supervise the investments. 

What teens will learn about investing

Consult a financial advisor or professional about your investing situation, and remember, all investments involve risk. As teens practice investing, they’ll need to learn simple concepts and strategies to be successful with their money. Encourage these seven key investing skills early: 

 

  1. Learn the basics of investing - learn about money concepts and keep growing your child’s financial education. 
  2. Start with what interests you - as you’re starting out, look for companies or investing ideas that interest you and make it easy to start forming good investing habits. 
  3. Know where your money is going - do research on your investments and find out any information you need to know about a company or opportunity before committing any money. 
  4. Learn the numbers - find out how to read key financial data and simple charts that help you understand how money works and moves.
  5. Practice with a mock portfolio - since most teens don’t have thousands of dollars to invest, they can practice how to manage bigger investments with a mock portfolio or stock market games. 
  6. Choose your online broker - teens will need to find an online broker that offers custodial accounts. Compare different custodial account options and see which one best fits your needs. 
  7. Avoid scams - Before you commit any money, make sure you’re confident in your investment and look for any red flags. Avoid scammers and opportunities that look too good to be true. 

Investing under 18 with very little money

Many parents and teens want to start investing but don’t have much money to get started. Luckily, it’s never been easier to start investing with very little money, and there are strategies you can use to keep your investments growing. 

 

If your child earns an allowance or gets paid for completing chores, they can set aside as little as $1 at a time to invest. Summer jobs and side hustles also make excellent added income for investing. Consider buying partial shares or using a simple investing app that allows you to invest small amounts at a time easily. 

 

If your child doesn’t earn an income, consider alternative ways to save. If they receive birthday or holiday money from grandparents or relatives, have them set aside a portion of their gifts for investing. Talk to your teen about asking for financial gifts like stocks or contributions to a custodial account instead of regular presents. Even small amounts over time stack up.

Custodial accounts for teen investors 

Kids can still invest in stocks and many other assets, so long as they have an adult’s help in opening a custodial account. Custodial accounts are joint accounts with both an adult's and child’s names. With a custodial account, teens can invest in stocks under 18 and learn the ins and outs of managing their own investment accounts. Parents can help their kids start investing early while keeping protections in place to help limit risk as kids learn how to invest under 18. Custodial accounts fall into two different categories according to the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). Both allow your children to invest in stocks under 18.

What is a custodial account?

Custodial accounts mostly all work the same, allowing you to invest in stocks, bonds, and other financial assets. Custodial accounts come with a few key benefits over regular investment accounts for kids. While a regular joint brokerage account gives both people on the account the right to manage funds, a custodial account is set up so that the funds belong exclusively to the child. Consider the following custodial account options:

  • UGMA custodial account: These accounts are a popular choice for parents and make it easy to start investing for your child in a wide range of financial assets. 
  • UTMA custodial account: These accounts are almost exactly like UGMA custodial accounts, but have a few key differences, like being able to hold real estate.
  • Custodial Roth IRA: If your child makes any income, you can open a retirement account on their behalf to build wealth for their later years. 

To open a custodial account, parents can shop around with online brokers who make it easy to open and manage investment accounts for kids. Make sure you research any broker and details of accounts you’re considering. Look into reputable online brokers like:

  • Charles Schwab
  • E-Trade
  • Fidelity
  • Vanguard
  • Merrill Edge
  • Ally Invest

What your kids and teens can invest in

Once you set up a custodial account for your kid, make a plan for investing. Your teen can invest in specific stocks or choose a less risky approach with index funds. They can learn how to spread out risk with different investments like bonds and CDs. Consider the following different ways your child or teen can start investing.

 

Stocks

Stocks are a great way to get kids involved in investing, especially when you show them how stocks relate to the businesses they love. A stock is a piece of a company, like Disney, Apple, or McDonald’s. When a company makes money, it pays stockholders a piece of that income in the form of dividends. As that company becomes more successful, your stock also goes up in value over time. Purchase stocks through a custodial account and hold them in your account as part of your investing strategy.

 

Stock market growth and value are measured in different ways. An overall index called the Dow Jones Industrial Average (or Dow for short) is a popular method that tracks 30 of the largest US companies’ stocks over time. It shows how stocks across the market generally rise and fall in value. These reputable companies, like Coca-Cola and Nike, make great first stock investments for teens. While share prices can be hundreds of dollars, you can purchase partial shares at a fraction of the cost.

 

Use a mock stock market portfolio 

To practice investing and get a better grasp on how the overall stock market works, teens can practice with a mock portfolio. Teens can invest with a simulated account synced to real-world prices and trading. Select popular stocks from different industries to build a well-rounded portfolio and see how your investment strategy holds up. Teens can select their favorite top brands from categories like:

  • Clothing: Lululemon, American Eagle Outfitters
  • Shoes: Nike, Vans (VF Corporation)
  • Restaurants: McDonald’s, Chipotle
  • Tech: Apple, Microsoft

Teens can learn how to research a company by looking at its annual report, which you can find publicly available by searching the company’s name and “annual report” online. Gather information about the company’s stock symbol (for example, Nike is NKE) and stock price. 

 

Get a general idea about the company through the report with basic financial data and words from the CEO. While you don’t need to understand all the information in the report, it helps to get a good sense of the business where you plan to invest. 

 

Bonds

Bonds are a type of debt security, meaning that you become the lender to the government or a company. As you hold the bond in your account, the borrower who uses the funds from your bonds pays you back interest for using the loan. Bonds aren’t as exciting as stocks, but savings bonds can be a great investment for kids, with low risk. 

 

Consider:

  • Series EE Bonds - These types of bonds offer a specific interest rate paid over 30 years. The U.S. Treasury announces the interest rates for new bonds twice each year. You can purchase a minimum of $25 in Series EE bonds but can’t exceed $10,000 in bonds each year. You can cash in the bonds after one year but pay penalty fees for withdrawing the bonds prematurely. 
  • Series I Savings Bonds - These bonds work almost exactly the same way as Series EE Bonds. The major difference between the two is the interest rates for Series I Savings Bonds are calculated using a formula that adjusts with inflation rates. 

 

Certificates of Deposit (CDs)

Similar to a savings account, certificates of deposit allow you to put your money into a savings vehicle that earns interest over time. However, CDs require you to leave your money in the account for a set period, sometimes years, to earn the desired interest rate.

 

A certificate of deposit may be a good fit for you if you plan on leaving your money alone for months or years but don’t want to risk losing any of your investment. CDs pay a guaranteed interest rate for a set period as long as you leave your investment in your account for the agreed term. That interest rate is typically higher than a regular checking, savings, or money market account. 

 

Funds

Different types of funds, like mutual funds or exchange-traded funds (ETFs), allow you to buy various financial assets all pooled together in one investment. Funds can be a great way to invest in many different companies at the same time and limit your risk. Consider adding funds to your portfolio like:

  • Mutual funds: Mutual funds are created by pooling money from many different investors. Each investor is part owner of the fund, with a share of profits and losses across all investments. 
  • Exchange-traded funds (ETFs): Similar to mutual funds, an ETF is another pooled investment, allowing you to buy small pieces of many different companies. ETFs trade very similarly to stocks, and you can find many different types of ETFs to meet your investing goals. Many ETFs are handled by automated strategies instead of people, meaning they cost less to manage as well.

 

High-yield savings accounts

A high-yield savings account is the easiest way to start earning interest for teens without any of the stock market risk. These savings accounts offer higher interest rates than a typical checking account or basic savings. High-yield savings accounts won’t make you rich, but they make a great way to introduce the idea of investing to kids and teens.

 

Roth IRA or retirement account

Investing for retirement before 18 just might be the smartest money move your teen can make. If they earn income, a custodial Roth IRA will allow them to begin investing for retirement and earning interest. Roth IRAs come with great perks, like post-tax contributions that allow your teen to grow wealth they can withdraw later in life tax-free. While kids are young and likely pay low tax rates, a Roth IRA can be a great strategy to grow wealth and save money on taxes down the road. 

 

There are countless ways to get your teen investing, but the best investment strategy is the one that’s easy to do. Talk to your teen and see what interests them about investing. 

Teach your kids about investing with GoHenry Money Missions

At GoHenry, we know how difficult it can be to teach your kids and teens about investing. That is why we have put together fun, easy to follow Money Missions. Our bite-sized lessons teach your kids what investing is and how it works, and introduces them to the concept of stocks and shares.

 

 

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Written by GoHenry Published Jan 3, 2023 ● 11 min. read