What are the risks of stock trading? This is a question that many people ask themselves before they make their first trade. This holds especially true when thinking about stock trading risk kids should understand before buying or selling any stocks.
It’s important to know what you’re getting into, and to be aware of how stock trading can positively and negatively impact your financial situation.
In this article, we will discuss some of the risks involved with investing in stocks for kids so that you can decide the best way to start investing with your child!
Discuss Financial Information Regularly
Give your children a head start on a stable financial future. Early investing can mitigate the risk of financial insecurity and broaden opportunities for your child.
Teaching your kids about investing can also help them be more financially literate, helping avoid making bad decisions in the future.
There are many different types of investment options to consider for small children. But getting them to that consideration will require consistent work to drum up interest in financial topics.
Broaching the subject of investing with kids can be a tricky topic with kids, especially when they have so many priorities competing for their attention.
Thankfully, you shouldn’t worry about that since having patience and showing them the importance of investing as a long-term endeavor go hand-in-hand.
Keep Your Child’s Attention and Focus on Long-Term
Start talking about investing like it is a normal part of life. Talk about this topic as if it isn’t a one-time thing. Explain it and make sure that they understand by answering their questions, finding fun facts or using some other sincere method of building interest.
To help your children become more knowledgeable about the stock market, talk to them about its aspects at least weekly. If you talk about the same topic a lot, your children will eventually ask questions.
Most kids want to engage and understand more about what you say. Therefore, emphasizing it regularly will lead to more fruitful conversations.
After explaining some of the stock market basics, you can then talk about good and bad investing ideas.
To give you ideas about good companies to follow, consider subscribing to or using:
These will all be good places for them to start and learn about exciting companies making the news.
You might also break down their favorite companies like McDonald’s, Starbucks, Netflix and others. By looking at these stocks for kids, avoiding use of technical jargon and speaking to them with a simple vocabulary they can understand, this will spark their interest.
By painting a full picture for them, you kids might have an easier time engaging in the conversation and following your overarching ideas.
With enough time, repetition and excitement, you can start to lure your children into the world of investing with ease and interest.
Discuss Stocks and Bonds and Which Make a Better Choice
You may already have a savings account set up for your child they know about. You hope making regular contributions will entice them to want to save themselves.
You may have also talked about how placing money in a savings account is risk free because they carry insurance. When making the next jump from saving to investing, you’ll want to introduce the concept of risk to your kids and compare that to saving.
By introducing the idea that stocks and bonds carry risk, but the potential for higher returns, they can understand how any one day may result in a different result for investments.
But over long-periods of time, when invested in the right stocks or index funds, they should go upward.
And more so than the interest earned on a savings account.
But that doesn’t mean you can predict stock returns. However, with enough time in the market in diversified investments, the market has risen consistently over the last century.
Likewise for bonds, they offer a lower return in exchange for taking on a lower risk. They serve as another type of investment more suitable to people with lower risk tolerance or a greater need for income than growth like stocks provide.
You likely want to start your child with stocks because they can afford to carry more investment risk in their portfolio while they’re young with little to lose.
Explain later in life makes a more suitable choice for bond investing when they likely need the retirement income when they quit working.
Stock Trading Risk for Kids
The risks of trading stocks can be high because you are bidding on an investment with no guarantee of what will happen next.
You could buy into a company and they could experience poor performance the very next day.
Likewise, you could purchase stock that rockets upward in a short period of time.
In the short-term, stock movements can appear random and not driven by any specific event related to the company itself. This can include market developments, economic changes or any other factor which investors think might affect the future profit potential of the company.
It’s important to understand that this is a risk and the value of your investment can go up or down. If you’re not willing to take on risks, then stock trading may be too risky for you.
If stocks are right for you, I recommend considering diversifying using an index fund long-term because it will still serve as an appreciating asset while also reducing your risk.
For example, if the stock market drops by 10% in a year, an index fund would be down a similar 10%. This is because it holds many different stocks instead of concentrating on one or two which may have fallen out of favor with investors.
Individual stocks will diverge from this rate based on any number of factors. Though, if you hold the stock as part of a broader diversified portfolio, your overall return will likely come close to the market return.
The goal for stock trading is to reduce volatility while still positioning yourself for profit over time, primarily in the long-term in my view. Stocks might move randomly in the short-term, but when chosen carefully, perform well over long periods of time.
Day trading, or the practice of buying and selling stocks intraday or over short periods of time, should not be how a child first learns to invest in stocks.
This practice requires identifying trends with stock analysis apps and doesn’t focus on an examination of company fundamentals or even following the market with useful financial news apps.
Kids should start investing in stocks by learning how to research stocks before you buy and gradually adding money into a portfolio as they learn the ropes. This will add incentive to continue learning while not placing significant amounts of money at risk as they learn.
Stock trading risk is a big factor in the investment decision. If you are thinking about investing your money in the stock market, make sure that you understand what stock trading risks might be involved and how they will affect the way that you invest your funds.
A diversified portfolio is the best defense against stock volatility.
How Can a Kid Trade Stocks?
For a kid to trade stocks, they need to have access to a custodial account. These accounts are set up by the parent or guardian, and allow a child to trade stocks.
Because these accounts require a custodian to manage the investment decisions, they offer better control over the risks involved with stock trading.
In fact, these accounts should carry limited risk with investing in stocks for kids, because parents should use the account to teach kids how to invest money prudently in suitable investments that kids find interesting.
You can contribute money to the account and manage it with their ability to see how you handle the investments together. A single adult can contribute up to $16,000 per year to the custodial account while a couple can contribute up to $32,000 per year if they file taxes jointly.
Custodial accounts come in two flavors:
- UGMA (Uniform Gifts to Minors Act) – These accounts allow a custodian to invest in traditional assets like stocks, bonds, ETFs, mutual funds and related securities.
- UTMA (Uniform Transfer to Minors Act) – This type of custodial account can be used in a variety of ways, which include alternative investments. Along with their traditional uses like financial assets and investment vehicles, UTMA custodial accounts can also be used to store items such as property deeds, automobiles and valuable art collections.
By using a custodial account to invest for your kids, this will keep their attention and give them a reason to track stocks and monitor portfolio performance over longer periods of time. You have a number of available options which allow you to trade stocks for kids and use the actions as a teaching tool.
Done correctly and with care, kids can take to investing on the right foot and start themselves off on a sustainable financial path.
Apps That Allow Stock Trading for Kids
The best investing apps for beginners focus on simplicity, functionality and ability to grow with the investor. Several investing apps also act as all-in-one financial solutions to provide a one-stop-shop for all things finance.
Consolidating these numerous related activities can provide an easier experience and not overwhelm with the difficulties of switching between apps to manage your money.
|☆ 4.8 / 5|
Teaching investing fundamentals with guidance from parents; allows individual and index fund investing
|$9.98/mo.||First month free|
|☆ 4.7 / 5|
Everyday people looking to start managing their finances
|$3/mo.-$9/mo.||$5 stock bonus for making a deposit of $5 or more|
|☆ 4.7 / 5|
Fee-free active trading and automated investing, Custodial IRAs
|$0 trading or automated investing; $125/yr. on M1 Plus subscription for custodial account||3 months of M1 Plus for free ($31.25 value)|
|☆ 4.7 / 5|
Age-based investments in custodial investment account
|*Apple App Store Rating as of Oct. 31, 2022|
1. Greenlight App
- Available: Sign up here
- Price: Free 1-month trial, $9.98/mo. after for Greenlight Max
Greenlight is an investment account that comes paired with a kids debit card.
It’s easy to use and can double as a banking apps for kids and teens. The app will teach you the basics of investing, how to trade ETFs, etc.
It works best if parents are involved in the process because it requires linked brokerage accounts from custodian 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.
- Greenlight offers flexible parental controls for each child and real-time notifications of each transaction.
- Greenlight is the only debit card letting you choose the exact stores where kids can spend on the card.
- Parents can use this app to teach them how to invest with a brokerage account through Greenlight Max and Greenlight Infinity plans
- Best-in-class parental controls (can prohibit specific stores)
- Can add brokerage account to invest in stocks
- Intuitive Parent and Kid apps
- Competitive cash back and interest rates
- High price points
- No cash reload options
- No parent / child lending
2. Stash Invest ($5 Bonus)
- Available: Sign up here
- Price: Growth: $3/mo. Stash+: $9/mo.
Stash is an all-in-one financial management platform, complete with investing, spending and banking functionality.
The app targets individuals just starting on their financial journey by making everything covered on the app accessible to all levels of financial literacy.
With time, the app aims to build up your financial skills and make you confident with your ability to manage and plan your money.
By signing up, you also can receive a $5 bonus for making your first deposit on the app.
Learn how to get free stocks and other sign up bonuses to add a jumpstart to your investments.
- Stash is a personal finance app that simplifies investing, making it easy and affordable for everyday Americans to build wealth and achieve their financial goals.
- Invest in stocks, ETFs, and cryptocurrency.
- Earn Stock-Back® rewards on every eligible debit card purchase.
- Special offer: If you sign up and make a $5 deposit, Stash will also provide a $5 sign-up bonus.
- Robo-advisor with self-directed investing capability
- Fractional shares
- Offers values-based investment options
- Get paid up to two days early when you direct deposit pay into your Stash account
- Charges monthly fee
- Smart Portfolios don't offer tax-loss harvesting
3. M1 Finance
- Available: Sign up here
- Price: Free trades, $125 subscription to M1 Plus required for custodial account
M1 Finance is an all-in-one personal finance solution that allows new investors to set up an account in seconds. If you want to use this as a kids investing app, you’ll need to apply for an M1 Plus subscription. The company has a limited time offer of the first year for free ($125 value).
You can open a custodial IRA with M1 Finance which offers investors the ability to create Portfolio Pies, or a diversified portfolio that rebalances to help you achieve your money goals.
M1 Finance is a service designed for self-directed investors by offering flexible, customizable and automated financial solutions. The platform manages your money intelligently based on how you want, as a free stock app.
Consider signing up for an M1 Finance custodial account or custodial IRA today.
- M1 Finance's Smart Money Management gives you choice and control of how you want to invest automatically, borrow, and spend your money—with available high-yield checking and low borrowing rates.
- Basic account includes an FDIC-insured checking account and an M1 Visa debit card.
- Upgrade to M1 Plus and unlock perks including 1% cash back, 4.50% APY, ATM reimbursements, and 0% international fees.
- Invest in stocks, ETFs, and cryptocurrencies.
- Special Promotion: Open an account and get 3 months free of M1 Plus* ($31.25 value).
- Robo-advisor with self-directed investing capability
- Attractive cash-back and APY opportunities with M1 Plus subscription
- Doesn't support mutual funds
- Doesn't allow trading throughout the trading day (1 trading window for Basic, 2 for M1 Plus)
- High cost for M1 Plus service tier
Related: 9 Best Robo-Advisors for Investing Money Automatically
- Available: Sign up here
- Price: Core (one child): $2.99/mo. Plus (unlimited children): $5.98/mo.
UNest is a new custodial account that allows parents to invest money for their kids for needs beyond just education but events like a new car, a wedding, vacation, or anything else a minor might want some day.
UNest offers the UNest Investment Account for Kids through an app that makes it easy for families of all income levels and backgrounds to set up and manage savings and investment plans for their kids.
UNest account holders can receive bonuses for their children’s UNest accounts via partner offers from companies such as Disney, AT&T, Uber, DoorDash, Levis etc through the UNest partner program.
- UNest is a tax-advantaged custodial investment account for kids. It allows them to save for an education, first car, house, wedding, or even for their financial security as an adult.
- UNest's investment options are portfolios of various low-cost ETFs that can achieve a variety of goals. They include a conservative portfolio made up of just fixed income and bond ETFs; three age-based options that hold bonds and stocks in conservative, moderate, or aggressive allocations; three similar options that are centered around socially responsible investments; and an aggressive portfolio made up of only stock ETFs.
- Accounts enjoy up to $2,200 in tax advantages: $1,100 is tax-free, and the other $1,100 is taxed at the child's tax rate.
What is the Kiddie Tax Rule?
One specific aspect of investing for kids in custodial accounts that you should be aware of is known as the “kiddie tax rule.” The government started to notice people exploiting a loop hole in share gifting and thus created new laws to counteract this.
To prevent people from abusing this loophole, the federal government enacted the kiddie tax.
The unearned income of the child is subject to the parents’ marginal income tax rate if it exceeds certain limits. This rule applies to all investment income for kids under 19 or full-time students under 23.
This doesn’t make the child pay any more taxes than they already do. The IRS allows the first $1,100 of unearned income to be tax-free, the second $1,100 to be taxed at the child’s rate and then any balance above that at the parents’ rate.
This means that if you put $1,500 into an Acorns account each year for your teenager and they earn under $1,100 in dividends, it’s tax free. However, if it’s $1,800, there will be taxes due on $700 of that amount.
If the account has $2,700 in dividends, $1,100 will be untaxed, $1,100 will be at the child’s tax rate and $500 at the parents’ rate.
How Old Should My Kid Be Before I Let Them Invest?
Every kid is different. Not all children show an early interest in investments, but some children are more naturally drawn to investing than others. The primary benefit of having kids invest is teaching them about money management.
Most kids tend to show an interest in learning about money around the age of 7 or 8 when they’re in elementary school and begin using money as examples in math class or become more aware of conversations you have with them about money.
Give your child a chance to experience money and risk through hands-on learning. You don’t need to give your child a $1,000 investment portfolio of index funds, stocks, or other investments, you can could use your own stocks as a teaching experience.
You want them to connect with the investment by choosing something they use regularly and have a vested interest in its success.
Your kid might feel invested in a company like Snapchat if they know it’s responsible for their favorite content. Likewise, they might enjoy your monthly celebration trips to McDonald’s or Starbucks and think stocks like those would be worth following.
You can also start small through buying fractional shares in companies through micro-investing. Starting small and building a portfolio over time can be another way to mark progress and keep your kids engaged.
This might show them how stock trading risk can be mitigated through long-term investing.
What is Micro-Investing and How Can It Help My Children?
So far, we have discussed long-term investing with larger amounts of money. If you want to get your kids started investing, that’s a great way to begin, but can require more money to invest upfront. Going big isn’t you’re only option, though.
Over the last ten years, micro-investing has changed how many folks invest and resulted in a surge of investor interest with the ability to save small amounts money.
Micro-investing is a form of investment that lets you buy fractional shares in companies like Google, Apple and Facebook, but also in index funds to diversify your portfolio with a single purchase.
Instead of forking over cash for a whole share of these world class companies or a diversified index fund with high share prices, you can break those shares into smaller fractions and invest piece by piece.
You can think of micro-investing like putting money in a jar. You put small amounts of money in the jar every day, and after a while you will have more than if you just left it there.
Digital platforms allow you to round up your purchases to the nearest dollar and log all of these transactions into a savings account.
For example, your kid might spend $3.50 on breakfast and lunch every day at school. The money app for kids will round that purchase up to $4 and deposit $0.50 from your child’s bank account into the savings fund.
If done over everyday over a 180-day school year, that translates to roughly $90 in annual savings before interest.
You might not get a whole share for a while, but you can continue buying into the stocks and index funds you want with small amounts of money.
You can invest through micro-investing apps like Robinhood or Acorns to get started with teaching stock trading risk for kids today.