There are many reasons why teens and those who may have not yet reached the age of legal adult adulthood should invest. The most significant advantage is the time they have to allow their investments to grow and increase in value. Sometimes it might seem confusing where to begin, but it does not have to be. There are many strategies and tools to help young people as they begin their investment journey. In this article, we break down the most important things that teens should know about investing.
- People who have not yet reached the age of legal adulthood have various options to begin investing in coordination with a parent or responsible adult.
- Beginning to invest at a young age provides significant advantages, as investments have a longer time to grow and benefit from the power of compounding.
- Although many brokerages and trading platforms have age restrictions, there are apps specifically geared toward teen investors.
Some people may have a misconception that investing is off-limits for people who are not yet legal adults. But unlike the casino or the bar, there are no age restrictions on investing. It is true that you generally need to be at least 18 years old to open your own brokerage account, but people younger than that have plenty of options to invest—although they require varying levels of supervision or collaboration with an adult.
People younger than 18 can get an early start on retirement planning through a custodial account. In a custodial account, an adult controls investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state.
The Importance of Investing Early
Beyond just being allowed to invest, younger people have an upper hand—quite simply, the sooner you begin investing, the more time your money has to grow. This early-mover advantage for younger investors is magnified by the power of compounding. As you reinvest your capital gains and interest to generate additional returns, the value of your account can snowball higher, making it even more beneficial to start investing while time is on your side.
A quick example can illustrate the advantages of getting an early start. Let’s say you begin to invest for retirement when you begin your career at age 22. If you consistently set aside $100 per month and earn a healthy 10% return on your investment (compounded annually), you would have $710,810.83 when you reach age 65. However, if you had started investing at age 15, you would have $1,396,690.23, or nearly double the amount.1
Riley Adams, CPA, is the founder and publisher of leading youth financial literacy website Young and the Invested and an expert on teen investing. For Adams, helping young people understand the benefits of investing early is an important step in encouraging their financial empowerment.
“The one thing, the last true edge in investing, is really time in the market,” Adams explains. People who realize this edge and begin to take advantage of it sooner in life increase their chances of financial success.
In a custodial account, an adult controls the investments on behalf of a minor until they reach 18 or 21 years of age, depending on the state. Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are a great way to transfer assets to a child or teen, but the custodian adult maintains the legal responsibility and the final say over the investment decisions.2
People younger than 18 can even get an early start on retirement planning through a custodial Roth individual retirement account (Roth IRA), but they will need earned income from a job or another paid activity to begin contributing.3,4 There are also joint brokerage accounts that allow minors to share legal ownership with an adult, which may help younger people take a more active role, although investment decisions are generally subject to approval by the adult co-owner.
Are You Ready to Invest?
The benefits of investing when you’re young are clear enough, but some teenagers may still be wondering if they’re prepared to take the leap. Here are a few questions teens may want to ask themselves as they consider whether the time is right to make their first investments:
- Do you have money from a job or another source that you won’t need to access immediately?
- Can you afford to lose this money if your investments don’t play out as planned?
- If you’re under age 18, do you have a parent or another adult willing to help you invest?
- Do you know what you’re getting into? In other words, do you understand the investment you’re considering and how it works?
According to Adams, companies that teenagers frequently interact with can spark an interest in investing. Buying shares of a familiar company is a way to enter the stock market while following the critical advice of investing in what you know.
“Being engaged with companies you see on a regular basis gets you interested, makes you want to understand how they tick, how they grow, how they make decisions,” Adams says. “And then once you kind of understand that, digging a little deeper and asking the question of: Do I think this is good, do I think this is going in the right direction, and then do I have money that I want to invest in it?”
The Risk of Investing
Just as younger people need to be aware of the upside of investing early and often, it’s important for them to know the risks. Of course, the main downside to investing is that it’s possible to lose some—or all—of your money.
While the reality of potential losses is impossible to escape, different types of investments are riskier than others, allowing you to control the amount of risk you would like to take on. As a general rule, the riskier the investment, the greater its potential to provide you with higher returns.
Understanding this tradeoff is a key for all investors—young and old—in determining their strategy. But yet again, youth has its advantages. Since younger investors have a longer time frame to remain in the markets, they can afford to take more risks, thereby increasing their potential rewards. When the inevitable market downturn strikes, younger investors have time to wait for the markets to recover.
This explains why the classic investment advice says that you should take more risks when your goals are far in the future but become more conservative as you approach the time when you’ll need to access your money. However, no matter your age, it’s important to discover your own style as an investor, ensuring that you’re OK with the level of risk you’re facing.
“People have different risk tolerances, and I think you need to be honest with yourself,” Adams advises. “If someone walks you through the logic of ‘You’re young, you should take on risk, you should let it grow’—but you just don’t feel comfortable with it, you absolutely should not do that. You should look for lower-risk investments that might not have as much upside but also might not have as much downside.”
What Teens Can Invest In
Once you get a sense of your own risk tolerance, you can begin researching investments with the characteristics that you believe will best help you reach your goals. Depending on what you hope to accomplish and in what time frame, here are a few of the more common types of investments, or asset classes, that you may choose to buy.
When you buy a stock, you take over a small share of ownership, or equity, in a publicly traded company. Stocks can earn you money in two ways:
- Many companies make payments known as dividends to their shareholders.
- Stock prices fluctuate based on the market’s determination of the company’s value, and if the price of your stock goes up, you can sell it for a profit.5
Because of their changes in value, known in the markets as volatility, stocks can be risky. If the company that you invested in begins to struggle, you may be left with shares that are worth less than you paid for them. However, with this risk comes higher potential returns, making stocks a useful investment for younger people with longer time horizons.
Whereas stocks represent a share in a single company, you can also buy shares of funds that invest in multiple stocks and other types of assets. Directed by professional money managers, mutual funds invest in an array of assets based on an objective outlined in their prospectus.6 Exchange-traded funds (ETFs) also own a basket of different investments, but they are designed to track a specific market index, sector, or other assets, and unlike mutual funds, they are available to trade on the stock market.7
Funds offer numerous advantages to younger investors. Since they comprise multiple investments in one, funds offer built-in diversification. In other words, investors in a fund automatically own a variety of assets, so if one component loses value, they won’t see their investment completely wiped out. While some mutual funds charge steep fees for taking an active role in managing the portfolio, passively managed and index-tracking funds generally have low fees and a proven history of providing solid returns, particularly over the long term.8,9,10
Instead of equity, or ownership in a company, bonds are a type of debt instrument. When you buy a bond, you are essentially making a loan to the bond issuer, who agrees to pay back the principal amount borrowed along with interest payments. Bond issuers include governments as well as corporations.11
Bonds are considered fixed-income investments because they provide preset payments over a particular time period.11 They are particularly useful for investors looking to generate a regular income. However, they are less risky than stocks and by extension offer lower return potential, making them less suitable for young investors seeking long-term growth.
Other types of investment assets could be suitable for certain young investors. For instance, certificates of deposit (CDs) allow you to earn a fixed interest rate on your investment over a specific time frame. CDs work a lot like a savings account, but since you agree to leave the money alone for the duration of the investment, you generally earn a higher interest rate.12 CDs are more conservative than stocks or bonds, with a more moderate risk profile but lower return potential.
The list of potential investments does not stop there. From high-risk cryptocurrencies to derivatives including futures and options, there are plenty of ways to put your money to work. However, since these instruments are riskier and more complex, they are more suitable for advanced investors than for those who are just getting started.
5 Steps to Start Investing as a Teen
For a young person who has decided to invest some of their money, the question is: What’s next? Here’s a step-by-step guide to help teens get started along their investment journey:
- Educate yourself about investing: There are plenty of online and printed materials to help you grasp the basics. You can also ask your parents or another person with investment experience to share their knowledge.
- Set your investment goals: It’s important to be up front about your end game. What do you want to do with the money? Is your goal far in the future? Setting clear goals will help you determine an investment strategy that works for you.
- Select investments: With so many options available, researching potential investments can seem overwhelming. It is key to ask yourself what type of investment has the best chance of helping you reach your goals.
- Open a brokerage account: You will need to open an account where you can buy and hold your investment assets. Although you will be unable to open a brokerage account on your own if you are under the age of majority, you can work with a parent, guardian, or trusted adult to open a custodial or joint account that will allow you to begin investing.
- Buy your selected investment: Now it’s time to put your investment plan into action. The process may vary based on the investment you’ve chosen, but you should be able to buy almost any asset on your brokerage platform’s website or mobile app.
How do you invest if you are under age 18?
If you are younger than 18, you cannot be the outright owner of a regular brokerage account. However, with the help of a parent, guardian, or another trusted adult, you are never too young to start putting your money to work for you. With adult supervision, you can open a custodial account, where the adult manages the investments on your behalf until you reach the age of majority, at which point you can take over official ownership. Alternatively, you can open a joint account where you and an adult legally share ownership of the assets.
Is it illegal to start investing under 18?
Although there are certain restrictions, no laws prohibit people from investing when they are underage. It is generally impossible for minors to open their own brokerage account, but custodial accounts and joint accounts allow young people to begin their investing journey with varying amounts of adult supervision.
How can I build my wealth at 16?
It is never too early to think about your long-term financial future. At age 16, there are some restrictions on how you can invest, but you can get started fairly easily with the collaboration of a parent, guardian, or another dependable adult. The conventional wisdom is that, at a young age, you can afford to take more risks with your investments, which will help you maximize your returns over time. In practice, this means concentrating on stocks and funds that have the potential to appreciate in value over time.
The Bottom Line
Although underage individuals will need to collaborate with a parent or another adult to begin investing, teens have a leg up—the supreme advantage of having time on their side. Custodial accounts and joint accounts provide an opportunity for teens to get a head start on building their wealth.
This article was originally published in Investopedia on February 28, 2023, and written by Michael Bromberg.
2. Image courtesy of iStock
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2. Financial Industry Regulatory Authority. “Saving for College: UGMA and UTMA Custodial Accounts.”
3. Charles Schwab & Co. “Schwab Custodial IRAs.”
4. Internal Revenue Service. “Traditional and Roth IRAs.”
5. Financial Industry Regulatory Authority. “Stocks: Overview.”
6. Investor.gov, U.S. Securities and Exchange Commission. “Mutual Funds.”
7. Investor.gov, U.S. Securities and Exchange Commission. “Exchange-Traded Funds (ETFs).”
8. Journal of Banking and Finance, via ScienceDirect. “Passive Mutual Funds and ETFs: Performance and Comparison.”
9. Financial Industry Regulatory Authority. “Exchange-Traded Funds and Products: Buying and Selling.”
10. Financial Industry Regulatory Authority. “Mutual Funds: Fees and Expenses.”
11. Investor.gov, U.S. Securities and Exchange Commission. “Bonds.”
12. Federal Deposit Insurance Corp. “Consumer Assistance Topics: Deposit Accounts.”
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