Most teens cannot directly open their own investment accounts. You usually have to be at least 18 years old for this. But with the help of a parent or guardian, teens do have a way to start investing in the markets.
The advantage of starting at a young age? More time in the market, which has historically led to higher long-term returns.
However, getting started is often the hardest part. While everyone’s investing journey will look different, there are a few basic steps teens and their parents can take to get off to a successful start growing their wealth for the future.
Why Should Teens Start Investing?
Many people only start investing in their twenties or thirties. But getting a head start has clear benefits. Investing early can help you develop financial literacy skills, learn more about risk management, and build a strong foundation for future financial success.
Other benefits of investing as a teenager include:
- Time on the market: With time on your side, you can harness the power of compounding to grow your investments significantly over the years.
- Higher return than saving: Investment returns can be higher than the interest earned on a traditional or high-yield savings account, leading to faster wealth accumulation.
- Cushion against inflation: Investments can deliver returns that exceed inflation, preserving the purchasing power of your money.
- Creates good financial habits: Investing early can help build good financial habits, such as regular saving and long-term financial planning.
- Higher risk tolerance: A longer investment horizon provides a higher risk tolerance, which can potentially lead to higher returns.
How you can start investing as a teenager in 4 steps
There are no age restrictions to start investing. So you don’t have to wait until you are 18 before putting money on the market. However, you will probably need the help and supervision of an adult.
1. Learn more about investing
Before you start investing, you need to understand the basics. This includes learning about different types of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). It also means understanding important investing concepts such as risk tolerance, diversification and compounding. There are many resources available to help you learn more about investing, from books and online courses to investing games and financial news sites.
2. Determine your investment goals
Determine what you hope to achieve with your investments. Are you saving for a down payment on a future home, building a savings pot for your retirement or just wanting to grow your wealth? Having clear goals will guide your investment decisions and help you choose the right investments. Remember, investing isn’t about getting rich quick, it’s about growing your money in the long term. For short-term goals, a high-yield savings account may be more suitable.
3. Open an investment account
To start investing, you need an investment account, a type of account that allows you to buy and sell investments. If you are under 18, you will also need a parent or guardian to help you create an account.
Your two main options are:
- Custodial accountt: An adult, usually a parent or guardian, opens a custodial account with a broker on behalf of a teen. The money and control of the account are transferred to the teen when they reach legal age (18 or 21, depending on the state).
- Invest with earned income: If a teen has been earning income from a job, they can use some of that money to invest with an adult in a personal Roth retirement account or a 529 plan. This is a great way to learn how to invest with real money, but with some guardrails.
The best online brokers offer account features like no minimum deposit requirement, no account fees, and no commissions for online stock and ETF trades. For example, Fidelity’s Youth Account is open to children ages 13 to 17 and has no minimum balance requirement to get started. You also have the opportunity to kickstart your investments with fractional shares for as little as $1.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are another popular option for custodial accounts. Joint brokerage accounts are another option where the adult and teen co-own the account.
When choosing a custodial account, consider factors such as fees, investment options and customer service. When you create an account, you will be required to provide certain identifying information, including your name, address, date of birth, and social security number, and the adult custodian will also be required to provide his/her personal information.
4. Select your investments
Once you have an account, you can start selecting your investments. Many experts recommend starting with stocks of companies you know and gradually diversifying your investments over time. Another strategy you might consider is buying some of the best index funds, which offer instant diversification. This way you don’t have to worry about selecting the “perfect” stock.
Start with small amounts until you get comfortable with the process, and remember to regularly review your portfolio and adjust as necessary.
How teens can learn the basics of investing
Learning about investing doesn’t have to be complicated. In fact, it can even be fun. Stock market games and virtual trading are two popular, risk-free ways to learn the ropes.
- Stock market games: These are all about friendly competition. You compete against friends or the public to select the best performing investments and manage a portfolio. The emphasis is not so much on trading, but rather on long-term investing throughout the game. Wealthbase and Wall Street Survivor are two popular stock market trading games.
- Virtual trading: This involves actively monitoring the market and trading securities virtually, not for real profits, but in a simulated environment. It typically uses a broker’s actual trading platform to familiarize you with the tools available. Primarily, virtual trading serves as a rehearsal for real trading and a way to explore a platform. Webul And Interactive real estate agents both offer easy-to-use paper trading accounts where you use virtual money to simulate real trades.
There are plenty of other resources available that can help you understand the basics of investing and develop a solid foundation of financial knowledge, including reading some of the best books on investing for beginners, checking out articles from reliable sites like Investor .gov and taking free online courses on the basics of investing.
What teens should consider before starting investing
Investing involves the risk that you will lose all or part of your initial investment. The degree of risk varies depending on the type of investment. For example, stocks are generally riskier than bonds, but also offer the potential for higher returns. It’s important to understand these risks and only invest money you can afford to lose.
However, don’t let the risks stop you from investing. Instead, learn to manage risk effectively by investing in low-cost, broadly diversified index funds, setting a budget for your investments, and maintaining a long-term perspective.
Before you start investing, it is useful to ask yourself the following questions:
- Do you have money to invest, and are you willing to lose some or all of that money if your investments do not perform as expected?
- Are you willing to spend time learning how to invest and manage your investments?
- If you are under 18 years old, are you willing to set up a custodial account with a parent or guardian?
If you can confidently answer “yes” to these questions, you may be ready to start your investing journey. Remember that investing is often a long-term commitment, so it’s important to keep learning and adapting as you go.
How can parents support their teen investors?
Parents play an important role in helping their teens navigate the world of investing. For starters, they can provide basic financial education and teach good financial habits. They can also help set up a custodial account, which allows children under 18 to invest in the markets.
Parents can also provide emotional support and guidance by helping their teens make informed decisions and learn from their mistakes. Most importantly, parents can model good financial behavior and demonstrate the importance of responsible saving, investing and money management.
In short
Investing as a teenager can be both a rewarding and educational experience. It can help them build wealth, learn the markets, and develop good financial habits that will last them a lifetime. Although investing involves risks, with the right knowledge, tools, and guidance, a teen investor can navigate the investing landscape with confidence. Remember, the key is to start early, invest regularly, and stay the course.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
