How to Invest in Stocks Under 18: A Comprehensive Guide for Teens

How to Invest in Stocks Under 18: A Comprehensive Guide for Teens

Investing in stocks at a young age can be a great way to jump-start your financial future and develop lifelong investment habits. As a teenager, understanding the basics of investing and learning about the stock market can put you in a position to grow your wealth exponentially over time. It’s important to remember that, while there is potential for substantial gains, there are risks involved, and diligent research should always be your first step.

If you’re under 18 and interested in investing, there are legal aspects to consider. In most cases, a custodial account needs to be set up by an adult, which allows you to buy stocks and make investments with the account overseen by the custodian. This structure ensures that legal guidelines are followed while you develop your investment knowledge and skills.

After gaining a solid understanding of investing and considering the legal aspects, you’ll be ready to choose a broker or platform, make your first investment, and monitor your performance in the market. With patience, dedication, and financial literacy, investing in stocks as a teenager can set you up for success in the long run.

Key Takeaways

  • Understanding the basics of investing and the stock market is crucial for teenagers interested in investing.
  • Legal considerations such as custodial accounts must be addressed before investing under 18.
  • Choosing a broker, making your first investment, and monitoring your performance are critical steps in developing your investment portfolio.

Understanding the Basics of Investing

Before diving into investing, it’s essential to understand some basic concepts that will help you make informed decisions about your money. In this section, we’ll cover the power of compound interest, the different types of investment accounts, and understanding stocks and bonds.

The Power of Compound Interest

One of the most important principles behind investing is compound interest. This is the idea that the interest earned on your initial investment (also known as the principal) is reinvested, thus earning even more interest over time. This allows your investment to grow exponentially, resulting in significantly more significant returns over the long term.

Here’s a key takeaway to remember about compound interest:

  • The sooner you start investing, the more time your money has for compound interest to work its magic, making your investments grow even larger.

Types of Investment Accounts

Several investment accounts suit minors, including custodial accounts, Roth IRAs, and brokerage accounts. While a minor cannot open these accounts independently, they can utilize adults’ guidance and supervision to manage them.

These are the main types of accounts to consider for those under 18:

  • Custodial Account: This account type allows an adult to act as the custodian for a minor’s investments until they reach the age of majority (usually 18 or 21). Once the minor reaches the age of majority, the account’s assets are transferred to them.
  • Custodial IRA: Similar to a custodial account, but with the added benefits of an Individual Retirement Account (IRA), such as tax benefits and long-term savings focus. Roth IRAs, in particular, could be an excellent choice for minors due to their tax-free growth potential.
  • Brokerage Account: For minors who want to invest in stocks and bonds directly, a custodial brokerage account allows them access to the stock market through their custodian’s supervision.

Understanding Stocks and Bonds

When investing in the stock market, the two primary vehicles are stocks and bonds.

  • Stocks represent ownership shares in a company. By investing in stocks, you’re buying a small piece of a business, which can increase (or decrease) in value based on the company’s performance. Stocks can be volatile, but they also offer the potential for higher returns than bonds.
  • Bonds, on the other hand, are like loans made to a company or government. As a bondholder, you receive interest payments from the issuer and, eventually, the return of the principal (the original amount you invested) once the bond reaches maturity. Bonds are considered a more conservative investment than stocks, as they generally offer more stable returns with less risk.

While learning about investing may initially seem daunting, understanding these basic concepts is an excellent starting point on your journey to becoming a savvy investor. Remember the power of compound interest, explore the various investment account options available, and familiarize yourself with the world of stocks and bonds as you begin your investment journey. Good luck!

Legal Aspects of Investing Under 18

Custodial Account Versus Regular Account

You’ll need a custodial account if you’re under 18 and want to invest in stocks. This type of account is specifically designed for minors and requires an adult, such as your parent or guardian, to act as custodian. The custodian will supervise and manage the account until you reach the age of majority in your state.

On the other hand, a regular account is for individuals who are of legal age and have complete control over their investments. You cannot open a regular account if you’re under 18.

Please note that the custodian in a custodial account has a fiduciary duty to manage the assets responsibly and in the minor’s best interest.

Uniform Transfers/Gifts to Minors Act

There are two primary laws governing custodial accounts in the United States: the Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA). Both acts allow an adult to transfer assets, such as stocks and mutual funds, to a minor without needing a trust fund.

  • Uniform Transfers to Minors Act (UTMA): The UTMA allows for a broader range of assets to be transferred, such as real estate, artwork, and intellectual property. Once the assets are transferred under the UTMA, the custodian manages the account until the minor reaches the age stated in the UTMA, which can be up to 25 years old.
  • Uniform Gift to Minors Act (UGMA): The UGMA is more limited than the UTMA and only allows the transfer of cash, stocks, bonds, and other similar financial assets. The age of majority for UGMA accounts is usually 18 or 21, depending on the state.

To open a custodial account, you must choose a broker and provide some necessary information, including the minor’s and custodian’s details. Choosing a broker that offers custodial accounts is essential, as not all do. Once everything is set up, your parent or guardian, as the custodian, can start investing on your behalf.

Key Takeaway: If you’re under 18, you cannot invest in stocks independently. You’ll need a custodial account managed by an adult, such as a parent or guardian. Be aware of the legal framework surrounding custodial accounts, including the UTMA and UGMA, which govern how assets can be transferred to minors.

How to Choose the Best Broker for Teens

Comparing Brokerage Features

When selecting a broker for investing under 18, comparing different brokerages and their features is essential. Some popular brokerages for teens include TD Ameritrade, Robinhood, Fidelity, Webull, and Ally Invest. When looking at your options, consider the following features:

  • Custodial Accounts: You will need a custodial account if you’re under 18 and want to invest in stocks. Make sure the broker offers these types of accounts.
  • User-Friendly Interface: Look for a platform with a simple, easy-to-use interface to help you navigate the investing process. Ideally, it should be easily accessible on both desktop and mobile devices.

Fees, Account Minimums and Other Considerations

In addition to comparing brokerage features, consider the following aspects when selecting the best broker for your needs:

  • Fees: Some brokerages offer commission-free trading, while others may charge a fee per trade. Low or no fees can be especially beneficial for beginner investors or those with limited funds.
  • Account Minimums: Some brokerages require a minimum initial deposit to open an account. Opt for a broker with a low or no account minimum, as you might be starting your investing journey with limited funds.
  • Educational Resources: As a teen, you’re likely new to stock investing. Choose a brokerage that provides educational materials, such as articles, videos, and webinars, to help you learn the ropes.
  • Customer Support: Make sure the brokerage offers reliable customer support if you need help with your account or have questions about investing.

Considering these factors and comparing the features of different brokers, such as TD Ameritrade, Robinhood, Fidelity, Webull, and Ally Invest. Ultimately, the right broker will give you access to the stock market and help you build your investment portfolio one step at a time.

Making Your First Investment

Researching Individual Stocks

Before diving into the world of investments, it’s crucial to research individual stocks. As a newbie investor, take your time to learn about major companies and industries, as well as their historical performance. Make use of online resources like Google Finance and other financial news outlets. Understand basic financial concepts and metrics, like price-to-earnings ratio and earnings per share. By doing so, you’ll be more equipped to make informed investment decisions.

Exploring Other Types of Investments

In addition to individual stocks, explore other investment vehicles like mutual funds, index funds, and exchange-traded funds (ETFs). These funds pool money from multiple investors, which is then invested in a diversified mix of stocks, bonds, and other assets. This can give you a diversified portfolio, even with a smaller investment amount.

  • Mutual funds are actively managed, meaning a professional manager selects the investments.
  • Index funds track the performance of a particular market index, like the S&P 500.
  • Exchange-traded funds (ETFs) can be bought and sold like stocks on an exchange and often track a specific index or sector.

Strategies for Reducing Risk

To minimize risk, employ these strategies while investing:

  1. Diversify your portfolio: Invest in a mix of individual stocks, funds, and other assets to spread risk across various sectors and companies.
  2. Invest in low-cost index funds and ETFs: These require lower management fees and help mitigate the risk of picking underperforming individual stocks.
  3. Start with a small amount: Begin your investment journey with a sum you’re comfortable losing. You can gradually increase your investments as you gain confidence and knowledge.

The Importance of Balance

A balanced investment approach is essential for long-term success. Maintain a diversified portfolio that consists of a mix of stocks, funds, bonds, and cash. Invest in different industries, sectors, and asset classes to ensure your investments are not concentrated in one area. Periodically review and rebalance your portfolio to ensure it aligns with your risk tolerance and financial goals. In doing so, you’ll be well on your way to building a solid investment foundation, all while minimizing risk and maximizing returns.

The Role of Apps in Investing

Investing in stocks can seem daunting, especially for those under 18. But with the right tools and resources, it’s more accessible than ever. In this section, we’ll dive into the world of investing apps and how they can help young investors get started on their financial journey.

Investing with Robinhood and Other Apps

One popular investing option for young investors is Robinhood, an app that makes buying and selling stocks, ETFs, and cryptocurrencies easy. Other apps, like Cash App and Stash, also offer investment features for young users (typically with parental permission). These apps bring the stock market to your fingertips and empower you to control your investment decisions.

Some key features of investing apps may include:

  • User-friendly interfaces
  • Low or no fees
  • Fractional shares, allowing you to invest in high-priced stocks with minimal capital
  • Educational resources and learning tools

These platforms offer a convenient way to invest and help young investors learn the ropes and develop their financial knowledge.

Pros and Cons of Investing Apps

Like any financial tool, investing apps have pros and cons, which are essential to consider before committing your hard-earned money. Here’s a quick overview:


  • Easy accessibility and user-friendly interfaces
  • Low minimum investment amounts
  • Helpful learning tools and resources
  • Real-time market data, news, and updates


  • May encourage impulsive investment decisions
  • Limited investment options compared to more extensive brokerage platforms
  • Potential security and privacy concerns

As you explore investing apps, consider their features, limitations, and potential risks. Make informed decisions based on your investment goals and risk tolerance, and always consult with a financial advisor or parent/guardian if you’re under 18 and unsure about any aspect of investing.

Key Takeaway: Apps like Robinhood and Cash App provide young investors an accessible and educational way to start investing. Weigh the pros and cons before committing to any platform, and use these tools as part of your overall financial plan.

Choosing the Right Time to Invest

The Benefit of Starting Young

Investing at a young age can significantly benefit your financial future. Starting early allows you to use compounding interest, which can significantly increase your wealth over time. You can learn from your investing experiences, mistakes, and successes, honing your financial skills for years. Furthermore, investing while young means you have more time to recover from potential losses. Here are some key benefits of starting at a younger age:

  • Longer investment horizon: More time to invest means more time for your investments to grow.
  • Compounding interest: Value increases could snowball and lead to exponential growth.
  • Risk tolerance: Young investors can generally afford to take on more risks since they have more time to recover from potential losses.
  • Financial habits: Developing good investing habits early on can set you up for lifelong financial success.

Considerations for Market Volatility

Entering the stock market at a young age doesn’t come without its challenges. One significant factor to be aware of is market volatility. Market volatility refers to the unpredictable fluctuations in stock prices that could lead to gains and losses. Here are some points to consider when starting to invest in volatile markets:

  • Diversification: Spreading your investments across different asset classes and sectors can help minimize the impact of market fluctuations.
  • Long-term perspective: Maintaining a long-term outlook can help you resist the urge to make reactionary decisions based on short-term market movements.
  • Consistent investments: Investing consistently over time, such as through dollar-cost averaging, can help smooth out market volatility’s impact on your portfolio.
  • Education and research: Become familiar with fundamental investing principles and stay informed about market trends and news to make informed decisions.

By understanding the benefits of starting young and being prepared for market volatility, you can make smart investment decisions before you turn 18. Remember that investing early can help secure your financial future, and with the right approach, market volatility can become an opportunity rather than a hurdle.

Understanding Tax Implications

How Investments are Taxed

When investing in stocks under 18, it’s important to know how your investments will be taxed. Generally, there are two types of taxes that investors need to consider: income tax and capital gains tax.

  • Income tax: Income from your investments, such as dividends, is generally subject to income tax. The tax rate may vary depending on your tax bracket and the type of income.
  • Capital gains tax: When you sell an investment, you may have to pay capital gains tax on the difference between the purchase and selling prices. For short-term capital gains (investments held for less than a year), the tax rate is usually the same as your regular income tax rate. However, long-term capital gains (investments held for more than a year) are taxed at a lower rate, typically 0%, 15%, or 20%, depending on your taxable income.

Tax Advantages of Certain Accounts

Some types of accounts offer tax advantages, such as the Roth IRA. A Roth IRA is a tax-advantaged retirement account that allows you to contribute after-tax dollars. Here are some of the benefits of a Roth IRA:

  • Tax-free growth: The investments within a Roth IRA grow tax-free, which means you won’t owe any taxes on the gains when you hold the investments.
  • Tax-free withdrawals: Qualified withdrawals from a Roth IRA are tax-free if you meet specific criteria (such as 59 ½ years old and holding the account for at least five years).

Early Withdrawal Penalties

While tax-advantaged accounts offer significant benefits, it’s essential to be aware of potential early withdrawal penalties. You may face an early withdrawal penalty if you withdraw funds from a tax-advantaged account before meeting the necessary criteria.

  • Retirement accounts: For traditional IRAs and 401(k)s, an early withdrawal penalty of 10% typically applies if you withdraw funds before reaching the age of 59 ½. Moreover, you may also have to pay income tax on the withdrawn amount.
  • Roth IRA: If you withdraw earnings from a Roth IRA before meeting the necessary criteria (age and holding period), you may have to pay income tax and a 10% early withdrawal penalty.

By understanding the tax implications of investing in stocks under 18, you can better plan, strategize, and ultimately make wiser financial decisions.

Investing for Future Goals

While under 18, you must start thinking about your future goals and how investing can help you achieve them. In this section, we’ll discuss investing strategies, focusing on education expenses, retirement, and the role of emergency funds.

Investing for Education Expenses

When planning for your future, it’s crucial to consider the costs of higher education. You can start investing for your education expenses by:

  • Opening a custodial account or a 529 plan, which are designed to help save for education costs
  • Diversifying your investments to spread risk and increase the chances of earning higher returns
  • Involve your parents or guardians in your investment decisions

Remember, investing early for education expenses allows your investments more time to grow, potentially reducing the need for student loans or other financial aid.

Investing for Retirement

Though it might seem far off, investing for retirement is essential, even for teenagers. Here are a few tips to get started:

  • Begin saving a portion of your part-time job income or allowances
  • Talk to your parents about opening a custodial Roth IRA or a Traditional IRA, both of which are excellent retirement savings options
  • As you gain more income, increase your contributions to retirement accounts and invest in diverse portfolios.

Investing early lets you take advantage of compound interest, which can significantly increase your retirement savings.

The Role of Emergency Funds

An emergency fund is a key component of any financial plan. It provides a safety net when unexpected expenses arise, such as medical emergencies, car repairs, or job losses. Here’s how to start building an emergency fund:

  1. Set a goal: Aim to save 3-6 months’ worth of living expenses in a high-yield savings account or another easily accessible account.
  2. Start small: Save small amounts regularly, even if it’s just $10 a week. Consistency is essential for building an emergency fund.
  3. Automate deposits: Set up automatic transfers from your regular savings account to your emergency fund to make saving effortless.

Investing for future goals is crucial for anyone, especially teenagers. Focus on saving for education expenses, retirement, and building an emergency fund to establish a strong financial foundation for your future.

The Importance of Financial Literacy for Teens

Financial literacy plays a crucial role in the lives of young adults, helping them make informed decisions regarding money matters. As a teen, embarking on your investment journey early in life can set you up for financial success in the long run.

Investing in stocks is an excellent way for young adults to build wealth. By starting early, you can use compound interest, allowing your investments to grow exponentially. This helps you accumulate wealth in the future and instills valuable financial skills.

Here are a few key points to help you grasp the importance of financial literacy in stock investing for teens:

  • Understanding risks and rewards: Being financially literate lets you comprehend the risks of investing in stocks. This way, you can balance risk and safety, improving your chances of success in the stock market.
  • Making sound investment decisions: As you delve into the world of stocks, analyzing and evaluating various investment opportunities is important. Your financial literacy skills will be useful in selecting the best stocks, diversifying your portfolio, and managing your investments.
  • Budgeting and saving: Financial literacy goes hand-in-hand with budgeting and saving. Learning how to manage your finances and save money will help you invest in stocks more strategically, ultimately leading to better investment decisions.

To sum it up, strengthening your financial literacy is essential to your investment journey as a teen. By acquiring essential financial skills, you’ll be better equipped to make wise decisions concerning stock investments, allowing you to build wealth effectively for the future.

Frequently Asked Questions

What is the process for minors to start investing in stocks?

Investing in stocks when you are under 18 typically requires a parent or guardian to open a custodial account on your behalf. This can be done through various online brokers that offer custodial accounts. Once the account is set up, your parent or guardian can help you invest in stocks and other securities while they maintain control of the account until you reach the age of majority.

What are the top investing apps for individuals under 18?

Several investing apps are available for teenagers to help start their investment journey. Usually, these apps require a custodial account, which allows minors to invest in stocks while under the supervision of a parent or guardian. Some popular investing apps include:

  • Fidelity Youth Account: This account is designed for teenagers between 13 and 17 years old, with features like stock and ETF trading, educational resources, and parent-approved spending limits.
  • E*TRADE IRA for Minors: This account allows children under 18 to start saving for their retirement while investing in stocks, ETFs, mutual funds, and other securities.
  • Stockpile: A user-friendly app that allows fractional share investing, which can be a cost-effective way for minors to start investing.

What are the best strategies for teenagers to invest in stocks?

To ensure a strong start for teenagers investing in stocks, consider these strategies:

  1. Diversification: Spread your investments across various stocks, sectors, and assets to reduce the risk of losses.
  2. Long-term focus: Aim to invest in reputable companies with growth potential rather than trying to time the market or chase short-term gains.
  3. Reinvest dividends: Automatically reinvest your dividends to boost overall investment value.
  4. Educate yourself: Learn finance basics, investing terminology, and how the stock market works to make informed decisions.

Are there any legal restrictions for stock investments by minors?

Minors cannot open a brokerage account or conduct trades on their own. However, they can invest in stocks through a custodial account. This account type is opened and managed by a parent or guardian until the minor reaches the age of majority. There are no other legal restrictions on investing in stocks for minors as long as the account is managed by an individual over 18 years of age.

What should a person under 18 know before investing in stocks?

Before investing in stocks, a minor should have a firm grasp of the following concepts:

  • The difference between stocks, bonds, ETFs, and mutual funds.
  • The importance of diversification and risk management.
  • Developing an investment strategy and setting goals.
  • The costs associated with investing, such as fees and taxes.
  • The process of researching and analyzing stocks to make informed decisions.

How can teenagers develop their investment skills and knowledge?

Teenagers can develop their investment skills and knowledge by:

  1. Reading books articles, and listening to podcasts about investing and finance.
  2. Engaging in online courses or attending workshops to enhance their learning.
  3. Discuss investments and financial topics with their parents, teachers, or mentors.
  4. Analyzing stock market trends and regularly reviewing their investment portfolio performance.
  5. Participating in virtual trading platforms or stock market games to practice and gain hands-on experience.