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.
Investing for Teens—Best Accounts to Consider
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How Old Do You Have to Be to Invest in Stocks?
Before you consider signing up for one of the best 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 joint brokerage or custodial account through a number of the best investing apps for beginners.
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 joint brokerage account with a company like Greenlight (covered more below).
→ Invest in ETFs
Exchange-traded funds accomplish a similar goal as mutual funds: providing instant diversification. But they have a few differences.
For one, mutual funds cost the same no matter what time of the trading session you order them. Their prices only change once per weekday: after the close of regular trading hours.
However, exchange-traded funds, as the name suggests, trade on exchanges just like stocks, and so their prices change all throughout the day.
While many mutual funds have a number of share classes with varying annual expenses, sales fees and investment minimums, ETFs don’t–an ETF has the same expenses for everyone, no matter where you invest in it, and the investment minimum is the price of one share. (Or, if you use a micro-investing app that offers fractional share investing, you can buy for as little as one dollar!)
Also, the vast majority of ETFs tend to be index funds, which means that rather than being managed by an individual or a team of humans, the fund instead automatically tracks a rules-based index (like, say, the S&P 500 or Dow Jones Industrial Average) by investing in the stocks that make up that index.
Because there are no managers to pay, index funds tend to be cheaper than their actively managed counterparts–meaning you keep more of your returns. (Note: Indexed mutual funds exist, too, but as a rule, a much higher percentage of ETFs are indexed.)
One low-maintenance yet effective long-term investing strategy relies heavily on exchange-traded funds.
These help defray risk by providing instant diversification, charge lower annual fees on average than mutual funds, and offer a wealth of strategies that mutual funds can’t match.
Also like stocks, ETFs can pay dividends, and you can compound both the fund returns and the income over the long haul–another great feature that makes them such a great investment option for teenagers.
(Tax tip: These dividends often count as qualified dividends, which generally are taxed at a lower rate than ordinary income!)
And remember: ETFs are typically every bit as “liquid” as stocks, meaning they’re very easy to sell when you’ve reached your predetermined savings goal.
(Another tax tip: If you sell ETFs–or stocks, mutual funds and other types of investment vehicles, for that matter–within a taxable brokerage account, you could be on the hook for capital gains taxes. Or, if you’ve had a bad year and are selling at a loss, you could actually save on your taxes!)
Types of Investing Accounts
You’ll need to open an investment account to begin buying stocks, mutual funds or ETFs. Two types of accounts will involve you co-owning it with your parent or guardian, while the third is held in your name and allows you to invest tax-free for retirement.
Account Type #1: Jointly Owned Brokerage Account
The standard type of brokerage account is an individual brokerage, in which one person’s name is listed as the account owner.
A jointly owned brokerage account, however, allows two or more people to sit on the account’s title and act as owners of all assets within the account.
These accounts most commonly exist between spouses, but they can also be opened between multiple family members (say, a parent and child) or two or more individuals who share financial goals (say, unmarried partners or business partners).
When a parent and child have a jointly owned brokerage account, they can share in the decision-making of what to buy and sell. Many investing apps for kids allow you to open a brokerage account with joint ownership.
Two things can happen in a jointly owned brokerage account that can cause you to owe taxes in a given year:
- Selling a stock or fund for a profit (capital gain).
- Receiving a distribution, such as dividends, bond interest income or capital gains distributions from a mutual fund.
When you recognize taxable events like the situations above in a joint brokerage account, you’ll need to figure out who pays the tax man. In some cases, the brokerage will determine this for you–by only allowing the primary account holder to serve as the record owner of all securities purchased in all accounts.
If a parent and child are joint owners, the adult will be responsible for filing any associated tax returns reporting gains or income received in the account.
In other joint ownership cases, reporting tax liability for your joint brokerage account is governed by state laws. States can use three means to determine how account co-owners hold rights over assets held in joint accounts:
- Tenants by entirety (TBE). In a TBE account, both people possess equal ownership over the property. The tenants are seen as one entity and have survivorship rights, keeping the property out of probate should one predecease the other. Only married parties (or domestic partners in some states) can be tenants by entirety, so you won’t encounter this with a joint brokerage account between an adult and child.
- Joint tenants (JT). Under this arrangement, all parties have an equal interest in the property held within the account. If two people share the joint tenancy, they each have 50% interest in the property, totaling 100%. Under JT, joint tenants are considered separate legal entities, but not protected from creditors as married couples are in a TBE. Joint tenants also have the right of survivorship, meaning the property doesn’t go through probate if one owner passes away.
- Tenants in common (TIC). TIC means two or more people share ownership rights in property in equal or unequal undivided ownership. If a joint brokerage account is owned by two people, even if they contributed different amounts–say, one person contributed 80%, and the other contributed 20%–all property is owned equally by the two. Also, neither person can claim ownership to any specific assets held in the account. TIC differs from JT because when an owner dies in a TIC, their share is bequeathed to heirs instead of the other owner(s). TICs do not have rights of survivorship.
You’ll need to determine if you have a joint brokerage account in a state that uses TBE, JT or TIC rules for assigning ownership and tax liability.
Each party on the account has ownership rights to the property, meaning all owners are liable for the taxes–if one owner doesn’t pay what they’re supposed to, all the owners are in trouble.
But typically, these ownership rules allow you to share payment for the tax liability between co-owners however you like.
So, for instance, one person might only have to pay 5% of taxes, and the other could pay 95%, so long as both parties mutually agree to those percentages.
Just remember that if you share the burden, it is clearly stated on your tax returns; if the adult agrees to shoulder 100% of the tax liability, for instance, all of that info must appear on their return, and none of it should show up on yours (if you file).
Ultimately, the IRS says you should file your tax return in accordance with your state’s laws for reporting taxable gains or distributions. IRS Publication 550 has more information on these rules and how you should report taxes in a joint brokerage account.
As you can see, this is a complex topic. Most taxpayers in this situation should consult a tax professional to fully understand the rules for a joint brokerage account.
- Available: Sign up here
- Price: Free 1-month trial, $7.98/month after for Greenlight + Invest
It works best if parents and/or guardians are involved in the process because it requires linked accounts from the adults’ banks or brokerages. Plus, parents and guardians will need to approve trades made in the investment account.
The all-in-one plan teaches them 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:
- Start investing with as little as $1 in your account
- Buy fractional shares of companies you admire (kid-friendly stocks)
- No trading commissions beyond the monthly subscription fee
- Kids can only invest in stocks and ETFs with a market capitalization over $1 billion.
- Parents must approve every trade directly in the app.
Consider opening a Greenlight Card + Invest account to start investing in a joint investment account today.
Greenlight currently offers a free one-month trial so you can see whether it really is one of the best investments for kids and meets all of your needs.
Read more in our Greenlight Card review.
Account Type #2: Custodial Account
A custodial account is a type of financial account that an adult maintains for another person, usually a child. Many parents use custodial accounts to invest for their teens.
Importantly, custodial accounts can hold a variety of assets–stocks and bonds, sure, but also CDs, insurance contracts, even antiques and collectibles.
The money in these accounts is controlled by a custodian, typically a parent. The teen or child doesn’t have access to the funds until he or she reaches that state’s age of majority. Depending on the state, that age might be 18, 21 or even 25.
Custodial accounts allow custodians to control assets for the benefit of the minor without the need for setting up a special trust fund, which has its own advantages but is a far more complicated process.
Whereas assets in a joint brokerage account are co-owned by the child and the custodian, assets in custodial accounts irrevocably belong to the minor.
However, the listed custodian 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 the account for any purpose that benefits the child.
Just like a jointly owned brokerage account, two types of events can cause you to owe taxes in a given year in a custodial account:
- Selling a stock or fund for a profit (capital gain).
- Receiving a distribution, such as dividends, bond interest income or capital gains distributions from a mutual fund.
Because the assets held in a custodial account belong to the beneficiary (in the case of teen investing, you, the minor), you shoulder at least partial responsibility for the taxes your account might require you to pay.
However, if your investments result in too much income or capital gains, the adult claiming you as a dependent might also fall in Uncle Sam’s crosshairs as well.
That’s because the so-called “kiddie tax” aims to discourage well-to-do individuals from transferring assets to their children and using their lower tax rates.
Current tax rules call for certain investment income (or, what the IRS calls “unearned income”) limits—including on capital gains distributions, dividends and interest income—above which, your parents must include your account’s gains and income on their tax return.
The tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24).
The limits work as follows:
- The first $1,100 of unearned income falls subject to the kiddie tax standard deduction, meaning it’s not taxed (that’s tax-free income).
- The second $1,100 is taxed at your (the child’s) tax rate.
- Anything above this amount must be reported on your parents’ tax return at their tax rate.
Let’s look at a couple of examples to explain this more clearly.
Example 1: Let’s say you are younger than 24 and a full-time student or under age 19 (regardless of student status), and your only income is the unearned income of $2,200 you receive in your custodial account. In this situation, your first $1,100 of investment income is tax-free. Your next $1,100 would be taxed at 10%, which would be your tax rate.
Example 2: Imagine you’re 18, earn $3,300 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 $1,100 in their taxable income, making it subject to taxation at their applicable marginal income tax rate.
In short, this means if your parent or guardian is in a high tax bracket, a custodial brokerage account becomes less attractive after the $2,200 investment income threshold.
These custodial accounts have no contribution limits. However, if someone else makes a contribution for you of more than $16,000 per year (or $32,000 for a married couple), they will need to pay the federal gift tax.
Unsurprisingly, deposits made in custodial accounts rarely exceed these amounts in any given year, as parents and guardians often try to avoid having to pay the gift tax.
Start with Index Funds in an Acorns Early Account
- Available: Sign up here
- Price: $5/month for Acorns Family (Custodial Account)
If you’re beginning your investing journey and wish to start by following a buy-and-hold strategy, consider investing in index funds.
You can diversify across several types of assets (stocks, bonds and even commodities such as gold and oil) to help smooth out your returns over time.
You can hold index funds in numerous types of investment accounts. Beginning with a micro saving app like Acorns Early, considered one of the best investing apps for minors and young adults, might be a good way to start.
The all-in-one personal finance app helps you to develop sound financial habits and grow your wealth over time.
The full product suite combines Acorns Early (a custodial investment account for minors) with an Acorns Spend bank account and a linked debit card for kids and teens that provides the signature “Round-Ups®” feature.
Upon signing up, the service even offers $10 in free bonus shares worth of value.
Learn more in our Acorns review.
Account Type #3: Custodial Roth IRA
Have you worked a summer job? Done some babysitting? Tutored some classmates for pay? If so, you’ve got what the IRS considers “earned income.”
That means you can contribute the lesser of your earned income or $6,000 per year toward your retirement and invest in a tax-advantaged manner.
Of course, you probably don’t have access to a workplace retirement account. That means you can really only contribute to an individual retirement account (IRA).
An IRA is a tax-advantaged retirement account that allows you to save money for retirement. You set up an IRA at a financial institution and make contributions that you can invest in a variety of investment choices.
There are two primary types of IRA:
- Traditional IRA: These retirement accounts allow you to contribute “pre-tax” dollars today. You only pay taxes on the money once you withdraw it, which you are allowed to do without penalty once you retire.
- Roth IRA: These work in the opposite manner. You can only contribute to a Roth IRA with earnings that you have already paid taxes on. However, once you contribute that money, that’s it–it’s never taxed again while it’s in your account, nor once you withdraw it.
Since you’re young (and likely don’t earn all that much), you probably pay very little in taxes, or you might not pay taxes at all. As a result, you’d want to lock in the low tax rates you pay now by making after-tax retirement account contributions to a Roth IRA.
And the best part about contributing to a custodial Roth IRA as a teenager: years – no, decades – of compounding returns.
Just have a look:
|Initial Amount Saved @ 18||Annual Contributions (Made @ Start of the Year)||Ending Balance @ Age 68|
|*Assumes average annual return of 9% compounded daily, no dividends or tax implications|
Let’s say you save up $5,000 by age 18, keep it in the stock market and never add another cent. That nest egg could still blossom into almost $450,000 by the time you retire.
Now let’s say you’re really aggressive and save $25,000 by the time you’re 18, then contribute the maximum each year until retirement–you would quit your job with $8.4 million in the bank!
Sure, it’s difficult to think about retirement when you’re in your teens. But think about it this way: Wouldn’t you love to spend your older years living comfortably while doing nothing?
Wouldn’t you like to work fewer years than most other people? Saving early, and saving a lot, can help you do that.
One note about custodial Roth IRAs and how they compare to normal Roth IRAs: You have to involve a parent or other adult to oversee the account as a custodian. Otherwise, they work exactly the same as any other Roth IRA.
While tax-free savings growth sounds great, you’ll need to know about some rules before you pull the trigger on a custodial Roth IRA.
First, you can fund a custodial Roth IRA with post-tax dollars up to your annual earned income or $6,000, whichever is less.
You don’t necessarily need to earn the money you contribute–people like your parents and grandparents can actually pony up the cash for the account contribution–but you will need to have earned the same (or more) income during the year.
For example, let’s say you worked as a tutor during the school year and earned $1,500. You can keep that money to use for your own needs, while a family member contributes an equal or lesser amount toward your custodial Roth IRA.
From there, you can let that money compound tax-free for decades before withdrawing it to enjoy in retirement. If you do this for long enough and continue making contributions, you’ll have a comfortable nest egg waiting for you in retirement.
And if you have a change of heart on the intended purpose of these funds? Most of the time, no harm, no foul–in other words, no penalties if you withdraw the money for qualified purposes. (Qualified purposes can include things such as buying a house, paying for college or emergency spending.)
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, all you have to do to start making profits is leave the money alone. No picking the right stock or fund necessary!
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 will, as the name suggests, earn you more money than a standard savings account. 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 over time when benchmark interest rates start heading higher, as they began to in 2022.
The longer you keep money (including interest earned) in the account, the more money you make while you sleep.
In fact, these accounts often require you to lock your money in for a specified minimum 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 product acting as a high-yield savings account you might consider with attractive interest rates comes from Greenlight Max.
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.
If you buy a drink for $4.25, for example, then the app would set aside 75 cents and invest it according to your selections.
Sure, each contribution is less than a dollar. However, if you regularly make purchases with your linked card, this pocket change will add up over time. That will help you build a nest egg with virtually no work needed on your end.
Think of these apps as advanced piggy banks, or banking apps for kids and teens. Where they outperform a piggy bank, however, is that the money doesn’t just sit there and lose value over time–it can be invested in assets that appreciate in value.
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.
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 you have a long, long time for your funds to rebound from any short-term declines.
How to Start Investing as a Minor
If you can start investing while you’re a minor or teenager, you’ll have a significant advantage when you’re older. In some cases, your money will have had 10, 20 or more years to grow than many of your friends and similar-aged relatives.
You can start small with a micro-investing account, make more substantial investments through a custodial account, or begin letting your money pile up 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.
Consider enrolling in a personal finance app like Greenlight–one of the better investing apps for kids–to leverage its bank account, retirement investing and after-tax investing options.
Borrowing on the theme of compounding interest, if you choose to invest just $5 a day from the day you turn 13 on the Greenlight platform, you could have $11,533 by the time you turn 18. (This calculation assumes an average annual return of 9%.)
Even better, if you choose to keep those funds in the stock market until retirement (age 68), even without contributing another dime, you could still end up with more than $1 million.
If you continue contributing $5 per day from age 18 to 68? Assuming the same 9% average annual return, that nest egg would be worth a whopping $2,850,578!
And if you could somehow increase that amount to $10 per day under the same assumptions, that investment balance would hit $4,660,487!
Consider talking to your parents about starting to invest by opening your Greenlight + Invest account today.