The shortest answer to the question of “How old do you have to be to invest in stocks?” is that you must be a legal adult in the U.S. Opening investment accounts requires that you sign a contract, but contracts are not legally binding if signed by a minor. The youngest age to buy and sell stocks depends on the state in which you live.
In most states, the minimum age is 21 to have your own brokerage account. However, in
California, Kentucky, the District of Columbia, Louisiana, Nevada, Maine, Michigan, New Jersey, Oklahoma, South Dakota and Virginia, you can start investing in stocks when you turn 18.
How to Invest in Stocks Under 18
There are a few different ways to begin investing in stocks under the age of 18. However, to invest at such a young age, the funds must be controlled by a parent or guardian. UGMA accounts (Uniform Gifts to Minors Act) are one way to start investing in the stock market.
Here are the details on four types of accounts you can use to invest before you reach the legal age.
Custodial brokerage account
Custodial brokerage accounts are an excellent option for minors who want to open a brokerage account. Most brokers have a minimum age for a standard brokerage account. Thus, custodial accounts are a great option. Parents who open a custodial account control and own the money, but the minor can develop their own investment strategies while the parents execute the trades.
529 plan
A 529 plan is different from a traditional bank account, but it shares one thing with savings accounts. A 529 account enables minors and their parents to save money for college. These accounts have an owner who controls the investments and asset allocation and a beneficiary, which is the minor.
Custodial IRA
If you’re considering a custodial account, an IRA might be a good idea to start investing at a young age. Minors are eligible to contribute to an IRA if they have earned income, which means they can start as soon as they get their first job. A Roth IRA and traditional IRA are both options, although the Roth might be the more attractive option due to its tax advantages in retirement. Depending on the brokerage firm, the only difference between a custodial and regular IRA may be how much money is needed for the initial investment. Keep in mind the contribution limits for IRAs.
Parent’s brokerage account
Aside from a custodial brokerage account, some parents may allow their children to use their account. Even though the account belongs to the parent or legal guardian, students may still be able to start their investing journey and begin investing.
What is a Custodial Account & How Does One Work?
A custodial account is an investment account, savings account or checking account that is legally owned and controlled by a parent or guardian, meaning they are the actual clients of the brokerage services, but their child contributes money and may have some input into investment decisions and how the money is used. They can watch their money grow as they age and have a large nest egg when they finally retire.
To get a custodial account set up, all you need is your child’s name, birthday, and Social Security Number.
Why Buy Stocks For Kids?
There are a few good reasons to consider buying stocks for kids, including making an investment in their future, teaching them to handle money, and allowing them to take ownership of their money..
Make an investment in their future
Perhaps the most important reason to buy stocks for kids is to make an investment in their future. By starting while they are young, they take advantage of compounding interest and learn how to develop a trading strategy. In a Roth, the money grows tax-free over their lifetime. The money is taxed at the child’s tax rate rather than the parents’ tax rate, which means significant tax savings.
Teach them about financial literacy
There are many educational resources on financial literacy available, but no resource is as good as hands-on experience with a Uniform Transfer to Minors or Uniform Gifts to Minors (UGMA) account, custodial account, high-yield savings account or other real money account.
Allow them to take ownership of the funds
Allowing children to take ownership of an investment account and start investing in the stock market while they are young helps them understand things like diversification and asset allocation and economic or market factors.As always, investing involves risk, but with so much time to make up for losses, children are less likely to take on too much risk.
First Steps to Investing in the Stock Market
To begin investing in the stock market, you must have an investment strategy, but before developing a strategy, you need to learn about the stock market.
Learn Stock Trading Terms
Some important stock trading terms to learn include:
- Bull market – a market in which prices have increased at least 20% from a recent low.
- Bear market – a market in which prices have plunged at least 20% from a recent high
- Earnings per share – the net profit of a company divided by its common share count
- Bid – the maximum price a buyer is willing to pay for a stock
- Ask – the minimum price a seller is willing to sell a stock for
- Spread – the difference between the bid and the ask
- Initial public offering (IPO) – the process of taking a private company public through the first offering of shares
Learn the Difference Between Stock Types
Some stock types include:
- Blue-chip stocks – bellwether companies with excellent reputations and a long history
- Preferred stock – shares of a company that offer some extra perks beyond common stock, such as dividend payments
- Common stock – standard shares of a company that usually come with voting rights
- Large-cap stock – companies with a market capitalization of more than $10 billion
- Mid-cap stock – companies with a market cap between $2 billion and $10 billion
- Small-cap stock – companies with a market cap between $300 million and $2 billion
- Growth stocks – companies expected to grow much faster than the average market growth
- Value stocks – companies with a stock price that looks low relative to their performance numbers
Learn the Many Types of Buy and Sell Orders
Some of the most important order types to know include:
- Market order – the most basic type of order to buy or sell immediately without regard to price
- Limit order – an order that sets a limit price so that it will buy or sell at a certain price or better
- Stop-loss order – Sets a price at which the order will be converted into a market order
- Stop-limit order – sets a stop price at which the order converts into a stop order and a limit price at which the stock will be sold or bought at that price or better
Learn the Types of Tradable Assets
The two main types of tradable asset classes are stocks and bonds, although cryptocurrencies, options, futures, commodities, mortgage-backed securities, foreign exchange contracts, mutual funds, ETFs and Treasuries can also be traded.
How to Invest Under 18: Investing as a Teenager
Teenagers who want to start investing might want to start with a high-yield savings account, which offers compound interest, and stocks, which can bring investment income.
Invest in Individual Stocks
UGMA accounts provide a way for parents to transfer financial assets to their minor children without establishing a trust. A parent or legal guardian acts as custodian for the account, offering a great way for teenagers to invest in stocks because the adult signs the buy and sell contracts for them.
Consider Paper Trading Apps
Teenagers can develop their own investment objectives by practicing trading through a paper trading app. Paper trading apps do not involve real money, but they do offer practice trading real stocks or bonds.
Invest in Index Fund ETFs
Exchange-traded funds are an excellent way for teens to get exposure to a diversified portfolio of stocks without buying individual stocks.
Invest in Mutual Funds
A mutual fund is another way to get exposure to a diversified portfolio of stocks. It’s important to realize that with mutual funds, as with all types of funds, past performance isn’t always an indicator of future performance.
Start with Index Funds on Acorns
Passive index-tracking funds also provide exposure to a diversified portfolio of stocks, and the stocks within them are traded automatically when there are changes to the index the fund tracks.
Investment Apps for Minors
There are many different types of investment apps for minors, including Acorns, M1 Finance, Greenlight and Stash. It should be noted that these apps require teenagers to open a custodial account.
Acorns
An Acorns account allows teenagers to invest their spare change, enabling them to begin investing even before they have a significant amount of money saved up. An Acorns Personal investment account offers all-in-one investment, retirement and checking accounts.
M1 Finance
M1 Finance enables teenagers to invest, borrow and spend on a single platform. The platform has fewer fees than the average SEC-registered broker-dealer, offering a way to save money while investing.
Greenlight
Greenlight + Invest is an investment account for minors that comes with a debit card.
Stash
Stash is a great way for teenagers to learn about investing. Adults acting as the custodian for the account choose how much to invest and can make automatic contributions.
4 Things to Consider When Buying Stocks for Teens
The things you should consider when you buy or sell stocks for teens are the same factors to consider if you are buying or selling for yourself.
Time horizon
When investing for teens, the time horizon is very long, so they can afford to take on more risk than someone who is later in their life. This is one of the greatest benefits of starting to invest during their teen years. They have plenty of time to make back any potential losses and have greater opportunities to build a financial future.
Diversification
Diversification is also an important factor. Even though teens can take on more risk, they still need to have a diversified portfolio. When one asset class is falling, others may be rising, more than offsetting the losses in the one asset class.
Taxes
Tax must be paid on unearned income such as that made from investments. Before the child turns 18, the first $1,050 in investment income is untaxed, and the next $1,050 is taxed at the child’s tax rate. Anything over $2,100 is taxed at the parent’s tax rate.
Account ownership
WIth a custodial account, the teen owns the account, but it’s controlled by the adult custodian. The teen can give input on what they want their parent or other adult to do with the money in their account, but the adult is the one who makes all the final decisions. When the child reaches the age of majority in their state, the assets or assets in the account officially pass to them. The majority age is 18 in most states, although it is 19 in Alabama and Nebraska and 21 in Mississippi and Puerto Rico.
FAQs
Can you invest in stocks at 16?
You can’t invest directly at age 16, but you can start investing through a custodial brokerage account or a parent’s brokerage account.
Are Micro-Investing Apps Worth It?
Micro-investing apps might not be worth it for anyone who wants to invest in individual stocks or contribute to an IRA. However, they might be a good choice for teenagers who have very little money to get started. Teens also might not be able to invest large amounts of money at a time, so investing spare change might make sense for them. However, if you can afford to make regular deposits of $100 or more, that would be a better option because you will build your nest egg much faster. Additionally, micro-investing apps can give a false sense of security in investing even though you are only investing spare change.
How to Start Investing as a Minor
Custodial accounts might be a good way for minors to get started investing. They can give their parents input on what stocks they want to buy and learn about the investment process.
Why Are There Age Restrictions on Trading Stocks?
There are age restrictions on stock trading because making trades involves signing a contract, and contracts are not legally binding if signed by minors.
Final Thoughts
Learning how to invest takes some time and effort, but any parent who teaches their child about it is giving them a head start for their financial future. Custodial investment accounts are a great way to let them get their feet wet while the parent still retains control of their money. Parents can set their children up for success by teaching them how to grow their nest egg from a young age.
