When looking into investing for kids, one question always comes up: how old do you have to be to invest in stocks?
The answer: it depends.
It depends mainly on which state you live in, but no matter what, you have to be at least 18 years old to invest on your own.
Though starting on your own is not your only option, and there are ways to start sooner. Which is great, because stock investing is one of the best ways to capitalize on compound growth and grow your net worth.
The sooner you can start investing, the better.
Below, you’ll learn how to legally start as soon as possible.
How Old do You Have to be to Invest in Stocks?
In most cases, you need to be at least 18 years old in order to invest in stocks. Though, this varies by state, as some states have stricter requirements and require you to be 21 years old.
How old do you have to be to invest in stocks: 18 or 21 depending on state laws.
You need to be at least 18 in order to buy stocks because that is when you can legally enter a contract. Minors cannot enter contracts, or invest in stocks on their own.
Though, as mentioned, investing in stocks on your own is not the only option for a kid or teenager. You could also:
- Save money in a high yield savings account
- Invest with a custodial account
We’ll dive into both of these investing alternatives below.
Save Money in a Savings Account
If you are not old enough to invest in stocks, you could open a savings account with a high interest rate as a backup plan.
One thing to keep in mind is you also need to be 18 years old to open a bank account, but with the help of a parent or legal guardian, you can open a joint account at a younger age. With joint accounts, the kid or minor is a co-owner along with the parent or legal guardian.
Eventually, once you or your kid turns 18, you can remove the parent or guardian from the account. Alternatively, you could close the original joint account and open a new one.
It’s worth noting that a bank account is typically needed to fund an investment account anyway. In most cases, opening a bank account should be done before you start investing.
Investing for Kids with Custodial Accounts
Another option you have when investing for kids who are not at the minimum age to invest on their own is to open a custodial account.
How Custodial Accounts Work
Similar to a joint bank account, a parent or guardian is needed to open a custodial account.
Once the account is open, the parent or guardian can then make investments on behalf of the minor.
Custodial accounts allow parents and legal guardians to open investment accounts and make investment decisions on behalf of their children.
Once the minor turns 18 (or 21 depending on your state), the account owner will transition to the new adult.
The details behind how custodial accounts function are laid out in The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA). The main differences between these two acts are the assets that they allow you to utilize, but both allow parents and guardians to save and invest in a child’s name until they reach the proper age to do so on their own.
Bonus: UNest is a company that makes it easier to invest in UGMA and UTMA accounts.
Types of Custodial Accounts You Can Open
There are a few different types of investment accounts that you can open as custodial accounts on behalf of your child.
Brokerage Accounts: Opening a custodial brokerage account is the most straightforward option. There are no contribution limits and few rules overall (outside of a potential account minimum), just like a typical brokerage account. While there are no direct tax benefits with this type of account, you may face tax consequences if you gift over $15,000 through a custodial account of any kind.
Roth IRA: With a custodial Roth IRA, you have to abide by the contribution limits set for regular Roth IRAs that year, but it’s a good way to grow investments for a kid tax-free. A Roth IRA is typically the preferred custodial IRA for kids over a traditional IRA since kids can benefit more from the tax advantages of a Roth IRA.
529 Savings Plan: 529 Savings plans are technically not a custodial account, but they are a way to save and invest on your child’s behalf. In this case, the money saved in a 529 account must be used for educational expenses (like college tuition). With a custodial account, the funds can be used as the child sees fit once they are of legal age.
Pros and Cons of Investing as a Kid
When investing on behalf of your child, there are a lot of pros. As mentioned, it’s a great way for them to start accumulating wealth very early on thanks to compound growth.
It also teaches them valuable general personal finance skills, like how to invest money, buy and sell stocks, and what a retirement account is, among many other lessons.
However, it also comes with its cons. The biggest negative is that it could inhibit their ability to get financial aid when applying for college since a custodial account is viewed as an asset for the child.
Investment Strategies for Kids
There are a few different options and investment strategies that work well for young adults who are just beginning their investing journey:
1. Investing in Stocks
One avenue to get started is to invest in individual stocks. Trading stocks can be a fun way for a child or teen to pick companies they like to invest in. Hopefully, going on to watch those companies grow and distribute dividend payments.
However, stock trading also has a decent amount of risk.
If you don’t have enough funds to build a diversified portfolio of stocks for your child, you may risk picking a couple of losing companies.
2. Investing in Index Funds or ETFs
My preferred method to invest, especially for beginners, is to invest in an index fund or exchange traded fund (ETF).
Index investing allows you to invest in hundreds or thousands of investments with just one purchase of one fund. You’re still investing in the stock market, but you are doing so more efficiently.
You could also diversify beyond just one fund by building a 3 fund portfolio using low-cost mutual funds, index funds, and exchange traded funds (ETFs).
3. Investing in Bonds
If you wanted to take a more conservative approach when investing with your kid, you could opt to invest in bonds.
Typically, this is not recommended for kids, since stock and equity tend to outperform bonds over the long run, and your child is likely investing for a longer period of time. However, if you have a low risk tolerance as an investor, it can be a good option.
4. Saving in a High Yield Savings Account
Last, you could opt to not invest at all, and simply open a high yield savings account for your child to teach them the value of saving money.
Brokerage Accounts for Kids (Online Brokers)
There are two main types of brokerage accounts: robo-advisors and traditional online brokers.
Robo-Advisors are online platforms that do 99% of the work for you when it comes to investing.
Typically, you get started by answering a series of basic questions before opening an account. Then, the Robo-Advisor recommends an investment strategy and makes transactions for you based on your answers.
Betterment is a leading robo-advisor where you can open a custodial account, it offers:
- Competitive fees
- A wide array of investment options
- A clean and modern software
- Tax-loss harvesting capabilities
Traditional Brokerage Accounts
Traditional online brokerage accounts give you 100% control over your investments. Also known as online stock brokers, you can select exactly which investment vehicles you want to invest in, and how much to invest in them.
Whether you want to trade stocks, buy shares of bond funds, or invest in REITs, the choice is all yours when you go through a traditional broker.
Charles Schwab is a leading standard brokerage account where you can open a custodial account, it offers:
- Low fees (commission-free trades)
- A wide array of investment options
- Excellent customer service
- Ability to start with a small amount of capital
Summary: How Old do You Have to be to Invest in Stocks?
In most states, you need to be at least 18 years old to invest in stocks on your own.
However, thanks to custodial accounts, parents and legal guardians can help kids start investing much sooner. Which is great, since the magic of compound interest gets better and better the longer you let it work for you.
On top of that, learning how to invest at an early age can be a valuable lesson for a kid.
Whether your financial goals include saving for retirement or just putting aside some cash for a rainy day, there is no reason you can’t start your investing journey today!