Investing and saving for your future whilst you are young is an excellent way to get ahead financially and learn the value of money.
Specifically, buying stocks when you’re young provides a great opportunity to understand the ins and outs of investing and investment growth before you reach adulthood.
However, there are limitations when it comes to investing when young due to age restrictions.
To learn more about age restrictions when purchasing stocks, take a look at the ultimate guide below.
We cover everything you need to know about investing young. Check it out!
How Old Do You Have To Be To Buy Stocks?
Generally, you need to be at least 18 years old to open a brokerage account. However, this may vary in different states.
For instance, some states don’t allow individuals to invest until they reach the age of 21 years old.
This is because stock trading is an actual contract. By law, minors cannot sign contracts. In fact, a contract signed by a minor is void.
As such, it is impossible for anyone under the age of 18 to legally purchase stocks by themselves.
This may be disappointing to hear if you’re younger than the stated ages – but not all hope is lost!
Even though children cannot invest themselves, there are a number of ways that adults can invest for children. This provides children with a bit of a head-start in their financial future.
Investing For Children
When it comes to investing for children, it is never too early to start.
In addition to providing them with a good financial start in life, investing for children provides you with an opportunity to teach them valuable lessons about money investing.
One of the best things about investing for children is that they have a long time horizon.
It provides an excellent opportunity for them to learn about the power of investment growth and patience.
By being able to watch their money grow, it is likely that they will become much better at saving as an adult.
If you’re interested in investing in a child, it can be a little tricky to know where exactly you should start.
Below, we’ve included a list of things you need to think about if you plan on investing in a child. Take a look – the child in your life will thank you (eventually)!
Account Type
It is first necessary to decide exactly what investment account is most appropriate for the child in question.
Very generally, this decision is contingent on whether the child currently has an earned income or not and the purpose of opening the account.
Custodial Brokerage Accounts
If the child doesn’t have a taxable income or wage, you can open a custodial brokerage account for them.
Technically, the account will initially be in the adult’s name, but the child will be able to take full control of the account when they reach the necessary age (either 18 or 21 years old).
Custodial IRA Accounts
If, on the other hand, the child in question has an earned income or wages, you can help them open a custodial IRA.
Specifically, a Roth IRA is ideal for children. Any contributions to the account will grow tax-free and they can be taken out of the account at any time.
592 Plans
A 592 plan is a type of investment account with a very specific purpose. These accounts can be used to save for a child’s educational expenses.
They come in two different types: prepaid college plans and college savings plans.
For the first, parents or guardians of the child lock in the price of college and pay in advance.
For the latter, parents or guardians of the child can invest in the account to grow funds that will specifically be used for the child’s education.
These accounts aren’t really used for children to learn about investment and finance. The money that is grown in these accounts can only be spent on educational expenses.
If the child wants to spend the money on something else, they will pay a 10% penalty and taxes on the earnings.
If neither of these accounts seems appropriate, you do have a few other options. Some brokerages have begun creating new types of accounts that are tailored towards teenagers.
For instance, Fidelity has a Youth Account that can be controlled by the teenagers themselves (aged 13 to 17).
Parent’s Brokerage Accounts
Parents can also purchase stocks for their children in their own brokerage accounts.
In cases such as these, the child in question doesn’t have any official ownership of that stock, so they have no legal claim to it when they reach adulthood.
Other Accounts
This account also allows for the parents to closely monitor the teenager’s activities. They will be alerted when the teenager makes any kind of trade or transaction.
This type of account is new and is distinctly separate from the types discussed above.
Brokers
Regardless of which type of account you want to open, before you can do so, you will need to find an appropriate broker.
It is always best to shop around a little bit to ensure that you’ve found the right broker for you and the child’s needs.
It is important to keep in mind that the best investment accounts for children should charge no account fees.
Additionally, there should be no minimum required amount for the initial deposit.
This will give the child an opportunity to invest and learn even if they don’t have very much money.
Personal Information
Opening a custodial account can be done very quickly. In fact, at most brokers, the whole process can be completed online in around 15 minutes.
However, before you do so you will need to make sure that you have all of the necessary personal information to hand. Different brokers may ask for different information.
However, generally speaking, you will need to have your Social Security number, the child’s Social Security number, your date of birth, the child’s date of birth, and contact information for both yourself and the child.
Additionally, you should be ready to supply your own employment information, and that of the child if they have a taxable income or wages.
You will also need to link your new account to another bank or brokerage account so that you can easily transfer money into your new account.
Decide What To Invest In
This is the fun part! Once you’ve got everything set up, you can start to help the child to decide exactly what they want to invest in.
They will be able to invest in all different types of stocks, including individual stocks, mutual funds, exchange-traded funds, and index funds.
To get the child started, we recommend steering them towards picking one or two individual stocks.
To ensure that they remain super interested in their investments, it is a good idea to pick names they are familiar with or even popular child-oriented brands.
To diversify their portfolio, we recommend building the account by focusing on low-cost index funds or exchange-traded funds.
By doing this, your child can invest in a huge amount of different companies in just one transaction.
Once you have purchased their investments, we recommend checking their earnings or losses with them quite frequently.
To keep them interested and dedicated, set a time every few days that you will dedicate to understanding the small fluctuations in their investments.
Conclusion
Whilst people under the age of 18 cannot invest, custodial accounts provide a great opportunity to teach kids about investing.
They allow young investors to take control over their finances while still learning about how markets work.
The key to success is making sure that you choose a reputable broker who charges no fees and offers easy access to the account and getting the child involved in their investment decisions.
