Investing as a teenager provides you with a significant financial advantage as you get older. You have more time than most investors to set aside funds for retirement, you can benefit more from compound interest, and you can even enjoy youth tax breaks.
Not to mention, investing as a teenager will give you valuable experience for later in life, when you can put larger sums to work.
Figuring out how to start investing as a minor can be difficult, but you can do it. But you will need help. Specifically, at the onset, you’ll need an adult you trust to help you set up and manage accounts.
Let’s take a look at how to invest as a teenager. This full primer will go over everything you’ll need, from how to get started to the types of investments teenagers should consider to the best investments for teenagers.
How Old Do You Have to Be to Invest in Stocks?
Before you consider signing up for one of the best free stock apps on the market and funding your account, you’ll need to ask yourself, “How old do you have to be to buy stocks?”
Well, if you want to invest in the stock market by yourself, you have to be an adult, or at least 18 years old to buy stocks.
Minors can’t invest in the stock market by themselves, teenagers under 18 included in that group.
If you want to learn how to invest as a teenager or minor under the age of majority in your state, you should open a custodial account through a number of the best investing apps for beginners.
What is a Custodial Account & How Does One Work?
A custodial account acts as a type of financial account an adult maintains for another person, usually a minor. There are two basic types of custodial account:
- Uniform Transfer to Minors Act (UTMA) accounts
- Uniform Gifts to Minors Act (UGMA) accounts
You can set up Uniform Transfer to Minors Act (UTMA) accounts with a large variety of various types of investment accounts.
The money in these accounts is controlled by a custodian, typically a parent, and the teen or child doesn’t have access to the funds until he or she reaches that state’s age of majority. For some states that age is 18 and for others it is 21.
Uniform Gifts to Minors Act (UGMA) accounts allow assets to be controlled in a custodian’s name to benefit a minor without the need for setting up a special trust fund.
UGMA accounts are held in the minor’s name (meaning the money belongs to the child), but the listed trustee can complete transactions on the minor’s behalf until they are of legal age to take over the account and its investments as a young adult.
You can use money from either type of account for any purpose and, subject to certain investment income limits, it only falls subject to taxation at the child’s rate. This rate may also vary by age and student status.
For example, let’s say you are under age 19 (regardless of student status) or younger than 24 and a full-time student. In this situation, your first $1,100 of investment income is tax-free. Your next $1,100 would be taxed at 10%.
As another example, imagine you’re 18, earn $3,500 of investment income and your parents still claim you as a dependent on their tax return. In this case, you’d not pay any tax on the first $1,100, 10% on the next $1,100.
From there, your parents would need to include the remaining $1,300 in their taxable income, making it subject to taxation at their applicable marginal income tax rate.
Anything above that would be taxed at your parent’s marginal tax rate. The IRS refers to this as the “Kiddie Tax.”
If your parent or guardian earns income in a high tax bracket, these accounts become less attractive after the $2,200 investment income amount.
Also, these custodial accounts have no contribution limits. However, any contributions over $16,000 per year (or $32,000 for a married couple filing jointly) means you will need to pay the federal gift tax.
As a result, deposits made in these accounts rarely exceed these amounts in any given year, lest the parents or guardians wish to fall subject to this gift tax.
How to Invest Under 18: Investing as a Teenager
The best investments for a teenager will include a combination of the most basic building blocks of any portfolio: individual stocks, mutual funds and exchange-traded funds (ETFs).
→ Invest in Individual Stocks
Investing in individual stocks (also called “equities”) is considered one of the best ways to generate growth from your savings–but this investment vehicle also comes with a high degree of risk.
When you buy a single company’s stock, you effectively get to share in that company’s successes— and its failures. If the company grows its profits over time, it’s likely that other people will buy the stock, driving up the worth of your shares.
If the company struggles to generate profits, existing shareholders might decide to sell, reducing the value of your stock.
While there are numerous ways to classify stocks, the most basic breakdown is growth stocks vs. value stocks.
Growth stocks are exactly what they sound like: They’re stocks belonging to companies expected to generate most of their returns from the growth of the company.
Investors in growth stocks are most concerned with how the underlying companies plan to improve their revenues and profits over time. The resulting growth is expected to compel other investors to buy the stock, driving up shares’ value.
Value stocks, on the other hand, are expected to generate much of their returns from what is effectively a reversion to the mean. (Think about a pendulum swinging back to the middle).
The basic premise here is that from time to time, good companies’ stocks trade for less (sometimes far less) than conventional wisdom would say they’re worth.
Value investors believe that even if the company doesn’t grow much at all, other investors will still see that the stock is undervalued, buy it and drive up the worth of their shares.
As famous investor Howard Marks succinctly concludes, “It’s not what you buy. It’s what you pay.”
That said, if you invest in the stock market, price gains aren’t the only way you can grow your money. Some companies will pay you cash–called “dividends”—in regular intervals simply as a reward for continuing to hold their stock.
Dividends are an integral part of many investors’ portfolios.
Consider this: Nearly 40% of the long-term performance of the S&P 500–a collection of the stocks of 500 companies that represent the American economy–comes from dividends. (The rest, of course, come from price gains.)
Thus, choosing to invest in dividend-yielding stocks as a teenager can become very lucrative long-term.
How much you will receive in dividends varies from stock to stock. Different stocks have different yields (a percentage that’s calculated by taking the company’s total annual dividends and dividing by the share price).
Companies pay in different intervals–monthly, quarterly, semi-annually or annually. And many companies will increase their dividends over time.
What you do with those dividends is up to you. Some people spend the income, other people take that income and buy different stocks, and still other people reinvest those dividends into the very same stocks.
You can use stock apps to trade individual stocks. But naturally, you’ll want to conduct research before trading, which you can do by reviewing the latest information on stock news apps and stock research sites.
Consider starting with these stocks for kids as well as reviewing the stock trading risks kids and their parents should understand.
→ Invest in Mutual Funds
One of the disadvantages of investing in individual stocks is that it’s extremely risky to put all of your money behind one or two companies. Individual stocks tend to be very volatile–meaning they can go up rapidly, but they can go down just as quickly.
A competitor might develop a superior product, or popular trends can pull people away from a company’s offering. And unless you happen to know the exact right time to sell your stock at the top (hint: nobody does), massive losses can erode your savings.
That’s why almost every investment professional will tell you to “diversify,” or spread your risk around many stocks and other types of investments. And one of the easiest ways to do that is investing in mutual funds.
Mutual funds pool many investors’ money to purchase a basket of investments. A mutual fund might provide you with exposure to the performance of 30, 300 or 3,000 stocks. Or it might invest you in bonds, real estate or other assets–or even a blend of stocks and these other assets.
Here’s the benefit: Let’s say a company represented by one of the stocks in the mutual fund’s portfolio goes bankrupt, and the stock goes to zero. If you had all of your money invested in that stock, you would lose all of your investment.
But by diversifying your risk across, say, hundreds of stocks in that mutual fund, you’re likely to only lose a small fraction of your investment–and in fact, the other stocks might perform so well that the impact of the bankruptcy is entirely erased!
Most mutual funds are “actively managed,” which means there is a single fund manager or a team of fund managers making investment decisions.
You can also benefit from the wisdom of expert fund managers. If you’re underage, you can have an adult open you an investment account for minors to buy shares in these investments.
You’ll also be able to buy other investments in this account as well, not just mutual funds. Consider opening a custodial brokerage account like the Greenlight + Invest account.
→ Invest in ETFs
ETFs accomplish a similar goal as mutual funds: providing instant diversification. However, mutual funds cost the same no matter what time of day you order them, while ETF prices change throughout the day.
This happens because ETFs trade on exchanges like stocks.
In many cases, ETFs don’t have investment managers actively managing holdings as often as mutual funds. In one way, this could mean a more cost-effective investment because this allows you to pay lower management fees.
This holds especially true for index funds which track a broad-market index, removing the need for active stock-picking.
My preferred investing strategy relies heavily on ETFs because these provide instant diversification, come with low costs and don’t try to outpace the market’s performance by taking on too much risk.
Because of these reasons, ETFs act as a great investment option for teenagers as they work best as long-term investments.
For example, if the stock market has a downturn, you have time for it to readjust in your favor before you sell. Another benefit to ETFs is that your money is liquid.
Once you sell, you can use the money for anything you want. Finally, like stocks, some ETFs make dividend payments.
When you receive these dividends, they may count as qualified dividends, thus falling subject to the passive income tax rate. This will cost you less in taxes in the long-run.
Start with Index Funds through the Greenlight + Invest Account
- Available: Sign up here
- Price: Free 1-month trial, $7.98/mo after for Greenlight Card + Invest package
It’s easy to use and can double as a savings account and banking apps for teens. The app will teach you the basics of investing, how to invest in stocks and ETFs, etc.
It works best if you involve your parents and/or grandparents in the process because signing up requires linked accounts from the custodians’ banks or brokerages. Plus, parents and guardians will need to approve your trades made in the investment account.
The all-in-one plan teaches teenagers important financial skills like money management and investing fundamentals — with real money, real stocks and real-life lessons.
You can use the investing feature to:
- Buy fractional shares of companies you admire (kid-friendly stocks)
- Start investing with as little as $1 in your account (with fractional shares)
- No trading commissions beyond the monthly subscription fee
- Parents approve every trade directly in the app on individual stocks and ETFs with a market capitalization of $1 billion+
Consider opening a Greenlight Card + Invest account to start investing in a custodial brokerage account as a teenager today. The first month is free to trial the product and see if it meets your needs as one of the best investments for kids.
Investment Accounts for Teenagers: Investing at a Young Age
|☆ 4.8 / 5|
Teaching investing fundamentals with guidance from parents; allows individual and index fund investing
|$7.98/month||First month free|
|☆ 4.4 / 5|
Automated investing in the background into diversified investments
|$3/month - $5/month||$10 sign up bonus when making first deposit at account opening|
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Everyday people looking to start managing their finances
|$1/month - $9/month||$5 stock bonus for making a deposit of $5 or more|
Why Teenagers Should Also Consider Having a High-Yield Savings Account
While savings accounts aren’t as exciting (and usually not as lucrative) as other types of investments, there are advantages to opening one.
If you’re new to managing money, savings accounts are a useful way to start experiencing the benefits of compound interest and practicing restraint from spending money.
Plus, once you open a high-yield savings account, you only need to leave the money alone to start making you profits.
With a high-yield savings account, you can have joint ownership as a teenager, as opposed to a custodial account where you can’t access funds until you reach the age of majority.
A high-yield savings account, rather than a standard savings account, will earn you more money. The average interest rate for savings accounts hovers around 0.06% APY.
However, some high-yield savings accounts can more than double that rate. And they can generate even more income when interest rates aren’t scraping the bottom of the barrel like they have in recent years.
The longer you keep money (including interest earned) in the account, the more money you make while you sleep.
It’s common for these accounts to have you lock your money in for a specified amount of time. For teenagers who don’t have bills to pay, this usually isn’t an issue.
When choosing a high-yield savings account, in addition to the interest rate, take into consideration any required fees and the minimum balance amount.
It can be useful for teenagers to set goals of how much money you intend to save in your account and possibilities for how you might want to spend it in the future.
Make expectations clear with anybody who has joint ownership of the account. Establish who is allowed to contribute funds, take funds out and view transactions.
A high-yield savings account you might consider with attractive interest rates comes from CIT Bank.
Are Micro Investing Apps Worth It?
These can be a fun, gentle way to start investing. Many of these financial apps for teens and young adults automatically round up the cost of your purchases to the nearest dollar. The rounded up amount is then automatically invested.
For example, if you buy a drink for $4.25, then the app would set aside 75 cents and invest it according to your selections.
Although each contribution is less than a dollar, if you make regular purchases with your linked card, this amount can add up over time and become a passive way to invest without actively remembering to designate deposits.
You can think of these apps as advanced piggy banks, or banking apps for kids and teens. Where they outperform a piggy bank, however, is investing the money in assets that appreciate in value instead of the money sitting there (and losing value over time).
Some money apps will allow you to set specific rules. For instance, you might set a rule that every time you get fast food from your favorite restaurant, your app contributes an extra dollar to your investments. Most apps will also let you set regular or one-time contributions.
One of the top benefits of micro-investing apps is that they are a very “set it and forget it” strategy. The money keeps adding up, and you don’t need to make any adjustments to the portfolio option you choose.
In addition to these apps’ simplicity, they are great for teens because time is on your side. Your funds have time to add up, and any money lost short-term has a long, long time to rebound.
How to Start Investing as a Minor
If you have the ability to start investing as a minor or teenager, you’ll have a significant advantage when you’re older.
You can start small with a micro-investing account, begin with more substantial investments through a custodial account, or begin saving money with a high-yield savings account. All leverage the power of compounding returns to your advantage.
In the end, no matter which method you choose, the sooner you get started, the better.
Borrowing on the theme of compounding interest, if you choose to invest just $1 a day from birth in the Greenlight platform, it could be worth $16,358 by the time your child turns 18 if you assume a 9% average annual return.
Even better, if you choose to continue investing until retirement (age 68), even without contributing further, the child could end up with more than $1,447,982.
If you continue contributing $1 per day from age 18 to 68? Assuming the same 9% average annual return, that nest egg would be worth a whopping $1,803,948!
And if you could somehow increase that amount to $5 per day under the same assumptions, that investment balance would hit $3,227,518!
Consider opening your Greenlight account today and see one of the best ways to invest $1,000 for your child’s future.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.