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If you’ve been wondering how to invest in stocks as a teenager, the short answer is you can invest in stocks, but with a little help.
Many brokerage companies require investors to be over 18 to open and manage their own accounts independently. That can give the impression that investing is prohibited for those under 18. But this is not necessarily the case. And there are ways for teens to invest, albeit through a parent or guardian.
What matters most at this stage is not just about being in the market; you must understand the concept of investing before committing real money. This allows ample time for learning, making (small) mistakes, and preparing for the future.
It can be a bit different than what adults go through, but the idea is the same: knowing how your money can grow and how to make good choices about where to put it.
Quick Answer
- Teens can invest in stock, but they will need a parent’s or guardian’s assistance.
- Most brokers require that accounts be in the name of an adult, over the age of 18.
- Investing can be done for minors in custodial accounts
- Custodial Roth IRAs can be opened if they have earned income
- Investing early is beneficial for learning and building lifetime investment habits
- Learning about risk is as important as starting early
Can Teenagers Invest in Stocks?
Yes, teenagers can invest in stocks, but typically through an investment account opened by a parent or legal guardian.
The legal responsibility associated with investment accounts in most financial systems means they must be opened and managed by an adult. That’s why under-18s can’t open brokerage accounts. But that doesn’t mean they are precluded from investing.
Rather, custodial accounts are put in place. These accounts are set up for minors and enable a parent or legal guardian to be the account holder. The parent or guardian oversees all the trades, regulatory issues, and other account decisions, while the teenager profits from the investments.
This arrangement has two benefits. First, it guarantees that transactions, compliance, and decisions for an account are made by someone who is legally permitted to do so. Second, it provides a learning environment where teenagers can learn about investing till they’re old enough to invest on their own.
In reality, many teenagers are actively participating; conducting research on the companies, talking about the investments with their parent or guardian, and watching how the investments are progressing. That’s where most of the learning takes place.
What Account Types Are Available for Teen Investors?
Most teenagers invest in custodial accounts, which are accounts set up and managed by an adult.
These accounts help manage financial assets owned by a minor until they reach adulthood, at which time the assets are transferred to the minor. But the account structure may impact how the funds accumulate and how they are spent.
Custodial Brokerage Accounts
A custodial brokerage account is an account that a parent or guardian can open and invest for a teenager’s benefit, but the investments are owned by the minor.
This is the most popular method for investing in the stock market. The account is in the minor’s name, but it is administered by the adult until the minor becomes an adult.
One thing to note is ownership. Although the adult controls the account, the assets and funds are owned by the teenager. This means the money should be for the teenager in the future, for example, to pay for college or for retirement.
Custodial brokerage accounts can hold a variety of investments. These can include individual stocks and bonds, exchange-traded funds, and index funds. This offers both the opportunity to learn and to diversify.
There is also a handover period. When the teenager turns the age specified by local law, the account is turned over to them. This means they can make all the decisions on buying and selling.
Custodial Roth IRA
If your teen has earned income, they can open a custodial Roth IRA to plan for retirement.
This account offers a new idea: investing for the long term, not the short term. The catch is that the teenager has to have earned income from a part-time job or freelancing. However, contributions to the account are usually limited to the teenager’s income.
The benefit of a Roth IRA is its long-term tax-free status. Contributions are made with after-tax income, and qualified withdrawals in the future are generally tax-free. This is a great opportunity for a teenager.
The earlier you start, the longer your time horizon. In fact, even modest savings may grow over time through compounding, depending on market performance and time horizon.
This doesn’t mean that every teenage kid should open up a Roth IRA, but for those with an income, it’s a great way to introduce them to thinking about the long term.
How Should Teenagers Start Investing in Stocks?
Teen investing should start with education, fundamentals, simplicity, and diversification.
The first step is not opening the account; it’s having a discussion. Given the requirement for an adult to be involved, it is important to talk about goals, expectations, and risk tolerance. This is the basis for account management.
Next, there needs to be a foundation of knowledge. Knowing what a stock is, why it might change in value, and how other investments work helps avoid investing in trends or “gut feelings”.
When it comes to investing, starting simple is better than trying to identify the “right” stocks. Diversified investments such as exchange-traded funds (ETFs) can provide exposure to multiple companies, so a poor performance by one company won’t have as much of an effect.
Another strategy is to be consistent. Rather than trying to time the market, by investing small amounts regularly, you can develop discipline (and avoid the stress of trying to make decisions at the “right” time).
As time goes on, teenagers can progressively become more involved in decision-making, from watching to doing. This is how experience and knowledge are gained.
What Are the Benefits of Starting to Invest as a Teenager?
Teens have time to enjoy the magic of compounding by beginning at a young age, learning about finances, and establishing good habits.
Time is an important investment asset. Early investment gives the investment more time to mature, and thus the returns that it generates can begin to generate other returns. The compounding increases with the longer the period of investment.
An example is that long-term investment can increase in magnitude by many times greater than the original investment, without the need to make large or frequent investments. The more time passed, the more the possible effect.
Knowledge is also gained through early investing. Through the experience of researching investments as teens, they get to understand the market behavior, the effects of investment decisions on returns, and how to make better decisions.
It also contributes towards discipline. These habits of regular saving, long-term thinking, and avoiding impulse buying are not only habits of investment, but of financial conduct more generally.
Early investing does not always translate to greater success, yet one can practice, experiment, and learn more.
What Are the Risks Teenagers Should Understand Before Investing?
Investing is risky, including the risk of losing money, and this should be at the forefront of any decision-making.
Share prices (stocks) fluctuate. Investing involves short-term fluctuations that can include losses, even of well-considered investments. It’s important to keep this in mind when investing.
It’s crucial to invest in a way that does not require withdrawal in the short term. Investing is a long-term endeavor, and short-term cash needs may lead to making decisions at the wrong time.
Overconfidence can also be an issue. Early success can sometimes breed overconfidence, which can lead to more risk-taking and, in particular, investing in individual stocks without diversification.
Emotional decision-making is another challenge. Responding to market events can result in buying when prices are high and selling when prices are low, which is counterproductive to growth.
Learning how to manage these risks is just as important as learning how to invest. Many times, it’s better to learn from the small losses early on, rather than the wins.
Frequently Asked Questions
Here are clear answers to common questions about investing as a teenager.
Many brokers require investors to be at least 18 years old to open and manage accounts independently.
Yes, but only if the account is opened by their parents or guardian.
It’s a minor’s account held by an adult, owned by the minor but managed until they are older.
Yes, earned income is required to contribute to a custodial Roth IRA.
Yes, custodial accounts can include ETFs and index funds for diversification.
The teenager can now manage the account.
Yes, individual stocks can be more volatile compared to diversified investments.
There is no fixed minimum; many accounts allow small starting amounts.
Final Thoughts
Teenage investing is not about complete freedom; it is about early investment in an environment that supports learning and growth.
There are restrictions, but these can be a good thing. With support, experience, and a long-term focus on learning, not earning, teenagers can be well on their way to success.
Time in the market is not the only thing that matters; time spent learning how it works is the biggest benefit.
Compliance Note
The account types discussed in this article are general investment account structures and may not be available through STARTRADER. STARTRADER primarily offers CFD trading products, subject to jurisdictional availability and applicable regulations. This material is provided for general informational and educational purposes only and does not constitute financial, investment, legal, or tax advice, or a recommendation or solicitation to buy or sell any financial instrument. Investing involves risk, including possible loss of capital. Regulations, account eligibility requirements, and investment products may vary by jurisdiction. You should consider your financial circumstances and seek independent professional advice where appropriate.
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