A Stock Investing Guide For Kids and Teens
Exactly how old do you have to be to buy stocks? In this guide, we’ll cover everything parents and youth alike need to know about investing for kids and investing for teenagers.
This guide will explore how old one has to be to invest in stocks, the numerous rules and restrictions for those under the age of eighteen, and how to choose the right broker as a young investor.
How Old do You Have to Be to Invest In Stocks?
In general, one can begin investing as a U.S. citizen at the age of eighteen. However, there is also the option of custodial accounts. A custodial account is a type of investment account that needs to be opened and managed by an individual over the age of eighteen, usually a parent or guardian of the child who will be investing.
Such accounts are usually opened for children by parents or grandparents. The two types of custodial accounts that are legal in the United States include the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The UTMA will cover more assets in most cases, which is the only big difference between them. A UGMA account will allow investors to trade stocks and bonds, while a UTMA will allow the same in addition to real estate. Such accounts are usually held at financial institutions and once the child reaches the age of eighteen, they can choose to take control of the account. Learn more whetherit possible to become a trader under the age of 18.
Main Investing Rules and Restrictions for Kids and Teens
Children under the age of eighteen cannot own stocks, mutual funds, bonds, and other financial assets on their own under U.S. law. Because of this, teen investors will often ask their parents to open custodial accounts for them. Just as well, parents may open custodial accounts for their children in order to help them build generational wealth. Investments can only be made via the supervision of an adult, and an adult will need to sign the child up for a custodial account. Even though the child owns the assets, only the adult can control the investments within the account.
There are a few things to look out for in a custodial account, which can be widely available among various online brokers. To start, ensure that your account has no stock trading fees for buying and selling stocks. It would also be wise to look for low-balance stock trading accounts that do not require a massive minimum deposit or overall account balance.
Account Types For Kids and Teens
There are a few different types of investment accounts for teens and children, all of which are considered custodial accounts.
UGMA (Uniform Gifts to Minors Act) accounts make it possible for anyone, including the child in question and any adult, to contribute money to the account. There are no yearly contribution limits typically associated with IRAs. These accounts are quite secure in the child’s favor, as contributions cannot be taken back from the minor once they have been transferred. UGMAs can only hold a few assets, including cash, stocks, mutual funds, and bonds.
UTMA (Uniform Transfer to Minors Act) accounts are very similar to UGMAs. The only major difference is that this account allows for minors to hold any form of property in addition to the asset offerings of a UGMA. Property can include real estate, art, land, vehicles, etc. Vermont and South Carolina do not allow UTMA accounts.
Roth IRAs are another option. One will need to open a custodial account, and the teen must have earned income that is taxable. There are also income limits per year, which are usually around $6,000.
For teens that have reached the age of eighteen, any investment account type is available to them in the U.S. However, we would recommend helping your teen set up an investment account on Robinhood or Webull. We would also recommend starting with simple stocks before moving onto ETFs and more complex forms of investing.
How To Choose a Brokerage Account For Minors? 4-Step Guide
Choosing a Stock Broker
The best possible broker for a child would be one that has no minimum deposit, no commission fees for trading, and a user-friendly mobile application. Paper trading would be another potential advantage to look for. Roth IRAs tend to be popular among parents who want to start an investment account for their children. In general, we recommend Webull and Robinhood for when your child turns eighteen.
| Broker | Stock Fees | Account Minimum | Extra Benefits | Overall Score | |
|---|---|---|---|---|---|
$0 |
$0 |
2 Free Stocks |
10 |
||
$0 |
$0 |
User-Friendly App |
9.6 |
Opening an Account
In general, a custodial account will require a few basic steps to open. To start, find a broker that offers custodial accounts with low commission and trading fees. From there, gather important information about your child. This will include things like their name, birthday, and social security card. Most custodial accounts will require a minimum deposit, but keep an eye out for accounts that require minimum account balances.
From here, you simply need to work with your child to choose the stocks and other assets they would like to invest in.
Market analysis and buying stocks
Market analysis is difficult even for adults, let alone children. Adults should actively help minors make better decisions about what to invest in based on the current market. A few basic principles involved in market analysis involve reading about companies and their financial performance and monitoring the stock market regularly.
Best Stock Strategy for Teens and Kids
In general, we do not recommend active speculation for investing teens, as it can be very risky and many newbies tend to have losses. The best strategy for youths in investing is to buy long-term, or “buy and hold.” This is a strategy that involves buying and “holding” stocks, or not selling them, for years. Warren Buffett is an excellent example of someone who began investing as a child and became one of the richest individuals in the world.
Stock Investing for Minors – Top 3 Tips
Understanding How Compound Interest Works
Compound interest is interest earned on a balance in an investment account that is reinvested, thus earning the account owner more interest. Such interest tends to accelerate the overall growth of the account over time, making it ideal for teens who are investing.
Understanding the Risks
Any investment in any market is subject to risk. IRAs are generally low-risk, while stocks can be a little riskier. The best way to avoid losing all of your money is to have a diverse portfolio filled with stocks, bonds, an IRA, ETFs, etc.
Learn How to Invest in Stocks Constantly
Contributions should be made to investment accounts regularly. In general, it is recommended to invest between 10% and 15% of one’s annual income.
FAQs
Is it legal to invest as a minor?
Technically, no. U.S. residents must be eighteen years old or older to open an account on their own. However, adults can open custodial accounts for minors that they will manage until the minor is of age.
What if a minor has taxable income?
Even if a minor has a job or has taxable income, they will still need to have an account opened by an adult. Custodial Roth IRAs are a popular option for teens who are working, as their contributions will become tax-free and can be pulled (with penalties, of course) at any time.
What should children and teens invest in?
This comes down to personal preference. In general, parents are encouraged to help their children pick one or two different stocks with businesses the child is familiar with, such as Apple. From there, the rest of their account should be diversified with index funds or ETFs, so they can invest in a number of different companies with a single transaction.
Can money be withdrawn from a custodial account?
Only if the money is being used for the benefit of the child. Account raiding could be subject to legal repercussions. When it comes to custodial accounts, adults are only able to contribute to the account and are unable to make any withdrawals once the account has been placed in the child’s name. A custodial account and the assets within completely belong to the child, even if there is an adult managing it and contributing to it.
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