Investing as a teenager provides you with a significant financial advantage as you get older. Not only do you have more time for funds to accumulate, but you can benefit from compound interest and youth tax breaks.
Furthermore, investing as a teenager gives you valuable investing experience for later in life. However, figuring out how to start investing as a minor can be difficult. You will 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, the types of investments teenagers should consider and 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 know one important rule about investing in the stock market by yourself: you have to be an adult, or at least 18 years old.
Minors can’t invest in the stock market by themselves, teenagers under 18 included in that group. Despite a number of apps like Robinhood and Webull looking like perfect fits for teenagers to dive into investing by themselves, you still can’t legally participate in the stock market by yourself.
If you want to learn how to invest as a teenager or minor under the age of majority in your state, you need to 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, often a minor. The two basic types of custodial accounts are the Uniform Transfer to Minors Act (UTMA) accounts and 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, only falls subject to taxation at the child’s rate. This 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%.
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. These custodial accounts have no contribution limits.
However, anything over $15,000 per year (or $30,000 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 this amount 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
Diversification is essential for investment strategies at any age. The best investments for a teenager will include a combination of stocks, mutual funds, and exchange-traded funds (ETFs). Stocks are often considered the most exciting type of investment vehicle, but also the riskiest.
→ Consider Paper Trading Apps
Before purchasing stocks, make sure to thoroughly research any you are considering. Some people choose to take investment classes first.
You can even create a virtual trading account with a service like Webull to test out making real stock trading for teens but with fake money to know what to expect when you start investing real money.
→ Invest in Individual Stocks
Investing in individual stocks can represent the greatest chance of capital appreciation because they can rapidly outpace a broader basket of stocks you hold in multiple companies.
At the same time, this can create a significant amount of risk from lack of diversification, exposing you to the ups and downs on one individual company instead of many.
Growth stocks focus on long-term capital appreciation as opposed to paying dividends to their investors. Depending on your investing objectives, you will need to decide whether you wish to invest for capital appreciation or for income-paying stocks in the form of dividends.
Choosing to invest in dividend-yielding stocks as a teenager can become very lucrative long-term. Dividends represent payments made by companies representing a percentage of their profits given back to investors.
The amount you receive depends on the number of shares you own in the company. In quality companies, dividends often (but not always) rise each year. If you reinvest your dividends into more shares, you will get more dividends in an advantageous cycle.
To trade individual stocks, have a look at some of the stock apps out there. Pair them with the stock news apps and you can really gain an understanding of the market from a young age.
→ Invest in Mutual Funds
You will also want to consider investing in mutual funds. Mutual funds combine investors’ money to purchase several types of investments, such as stocks, bonds, real estate, and more.
The fund manager is in charge of trading the fund’s underlying securities. Typically, mutual funds are safer than investing in individual stocks because the risk is spread out among many investments.
You can also benefit from the wisdom of expert fund managers. If you’re underage, you can have an adult open you one of the mutual fund accounts 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 with a company like Firstrade.
Alternatively, you can often save money on trade commissions if you purchase funds directly through a mutual fund company.
→ Invest in Index Fund 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.
Investment Accounts for Teenagers: Investing at a Young Age
|App||Rating (out of 5)||Fees||Best For||Promotions|
|Greenlight||4.7||$4.99-$7.98/month||Teaching investing fundamentals with guidance from parents; allows individual and index fund investing||First month free|
|Acorns||4.8||$1/month - $5/month||Automated investing in the background into diversified investments||$10 sign up bonus when making first deposit at account opening|
|Stash||4.7||$1/month - $9/month||Everyday people looking to start managing their finances||$5 stock bonus for making a deposit of $5 or more|
|M1 Finance||4.3||$0 trading or automated investing; $125/year on M1 Plus subscription for custodial account||Fee-free active trading and automated investing||$30 sign up bonus with $1,000 deposit|
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 practice 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 0.09% APY.
Some high-yield savings accounts can almost double that rate or amount to far more when interest rates don’t scrape 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 invested according to your selections.
Although each contribution is less than a dollar, if you make regular purchases with your linked card, over time this amount can add up 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. Though, 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 saving 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 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-savings 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 Acorns platform, it could total a value of $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/day from 18 – 68? The amount reaches $1,803,948 if you assume an average annual return of 9%.
If you increase this amount to $5/day under the same assumptions, your investment balance will exceed $3,227,518.
Consider opening your Acorns 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.