As parents with growing kids, we work hard to instil a sense of money awareness in our children from a young age. Schools today do not teach personal finance much until late (although this may be changing now with growing awareness of the importance of personal finance education). Stock ownership helps a child learn many important topics around money, wealth, economics, business, retirement, savings, and building and growing assets.
You may have also found that your kids have started taking interest in investing in stocks. If this is the case and you want to know more about how old do you have to be to invest in stocks, read on. We will also discuss an exciting new development that gives your kids additional way to invest in stocks.
Why You Should Start Investing in Stocks?
Investing teaches many money skills. Your child will learn key skills like managing their own brokerage account, making day to day investing decisions, selecting investments from different options, learning about capital, business, profit and loss, the stock market, and in general managing their own money. These skills are critical when your child leaves home to go to college or take on a new job. Although retirement may be quite far away in their minds, starting to invest early will help them learn to set goals and methodically work towards them.
Financial Benefits of Starting Investing at an Early Age
There are many benefits to start investing early:
- Saving for College: You can set up separate accounts for each child to save and invest for their college. These accounts can be in form of a 529 College Savings plan or a regular brokerage or custodial account.
- Longer Compounding Period: Early start to investing provides a longer runway for the investments to perform. Start investing a few years early and longer compounding will ensure your child will see significantly higher investment returns and account value when they retire.
I recommend you start looking in to starting your kids to invest in the stock market as soon as they are 13 years old. At this age, they are old enough to understand the basics of money and investment and they are keen to learn the good money and investment habits you want to impart to them.
How Old Do You have to be To Invest in Stocks?
You can invest in stocks at any age. There is generally no minimum age to buy stocks or hold stocks. However, most brokerage firms require you to be at least 18 years old to open an account in your own name. Until you are 18, you have other options to consider if you want to start investing in stocks now.
What Investment Accounts are Available for Teens to Invest?
A teenager can invest in stocks in one of the 3 different types of accounts:
- Roth IRA Account: if your child has earned income, you can open a Roth IRA for Kids. The minor owns the account while an adult manages it. You can contribute to this account with post-tax income if your child has qualified income in a year. This could include income from normal summer jobs like mowing lawns or tutoring younger kids. Contributions to this account are capped to the annual contribution limits. One benefit of this account is that it may be possible to withdraw for certain qualifying uses which may include education expenses. Most brokerages allow investment in stocks, etfs or mutual funds in these accounts.
- 529 Savings Plan: Though not strictly an account that your teen can use to invest in stocks, they can certainly take an interest in picking and managing the investment options in these accounts that are for their benefit. 529 Savings Plans are offered by a State, and are meant to cover educational expenses for in state or in some cases out of state institutions. 529 plans come with special tax benefits at the State and Federal level.
- Custodial Account: These accounts are opened and operated by an adult for the benefit of a minor under the Uniform Gifts/Transfer to Minors Act (UGMA/UTMA). The money in the account belongs to the minor and is transferred to them between the ages 18-25. This is a way of transferring wealth to your kids. You can invest in stocks, bonds, mutual funds and other assets.
- New – Fidelity Youth Account: Fidelity just started this new type of account called Fidelity Youth Account. This is a regular brokerage account for teens that gives an adult/parent the oversight on the account. The teen however has complete authority over the account that includes buying and selling stocks, managing cash and debit card and choosing their investments.
New Type of Stock Investing Account for Teens: Fidelity Youth Account
The new Fidelity Youth Account is something I have been waiting for a long time. In retrospect, this appears to be the perfect solution for teens to start investing in stocks, bonds or mutual funds in their own brokerage account, and at the same time give parents a way to oversee the activity. This is a taxable brokerage account so the teens will learn all aspects to savings and investing: buying stocks and selling stocks, researching investments, money management, using debit card, saving money for the future, planning for and paying tax, and of course learning about investing early with your guidance and making mistakes early when the stakes are lower. Fidelity also provides extensive learning resources for your child to learn to invest and save.
This account is available for teens at the age of 13. When the child turns 18 years old, the account automatically converts into a regular brokerage account. Until then, the account comes with certain restrictions. Options trading is not available and neither is margin investing. If you have a relationship with Fidelity, you need to check this out. This is one of the best ways to get your kid started on their path of future investment success.
You Can Invest, Now What? Buy Stocks Carefully – Avoid Day Trading
As a teen today, you have many ways to invest. Whichever way you choose, remember that you buy stocks as investments. With low or zero commissions and the ease of transactions, it may be very tempting to indulge in high frequency trading. However, this can be fatal to your portfolio. As you begin your investment journey, take some time to learn about proper investing for the long term, and take it slow. Please avoid day trading. Day trading kills more portfolios than it creates millionaires.
Treat Money as Your Asset and Your Responsibility
You can use money to buy things you want. You can also use money to grow your wealth and gain early financial independence. If you delay instant gratification and invest for the future, you will find that you will be able to do more things you want and bring comfort and joy to more people around you. Your money is your asset, you can choose to spend it now, or you can choose to shepherd it and nurture it and grow it for the future.
While you can use a Youth Account or Custodial Account to start investing, I recommend you consider opening a Roth IRA for Kids if you have earned income in any year. This will help you start thinking about long term investing and the benefit of deferring taxes on your investment income.