Stocks for Teens - How Teens Can Start Investing Before 18

Investing isn't just a game for adults.

Teens have a significant opportunity to get a head start in the financial world.

As teenagers edge closer to adulthood, they can begin to take more control over their financial futures, even before they turn 18.

With the right guidance from an adult and the use of modern tools, teens can learn valuable lessons in investment and financial responsibility.

From a young age, teens can begin to understand the workings of the stock market and the potential of compound interest.

With the right guidance from an adult and the use of modern tools, teens can learn valuable lessons in investment and financial responsibility.

But they'll need a little help from the adults in their lives to start investing.

Up Ahead:

The Role of Parents in Teen Investing

The first step for a teen interested in investing is to have a conversation with a parent or another adult who can help.

Legally, minors cannot open investment accounts on their own. They need an adult to set up a custodial account for them.

This type of account allows teens to have investments in their name, but with adult oversight until they reach legal age.

Teens need an adult to set up a custodial account for them.

Parents play a critical role in facilitating their teen's entry into the world of investing.

Explaining Financial Concepts‍

Parents can help demystify complex terms and principles in investing, making them more accessible and understandable for teens.

For starters, parents can teach about the importance of setting financial goals, understanding risk and reward, and the significance of compound interest.

Parents can help teens grasp these concepts through relatable examples and discussions about different types of investments.

Joint First Transactions

It's recommended that the first few investment transactions be done together.

This collaborative approach helps teens learn the process and understand the decisions behind each investment.

Ongoing Involvement

Initially, parents should stay actively involved, guiding teens through the nuances of portfolio building, understanding risk, and learning about different investment options like index funds and ETFs.

Investment Accounts for Teens

There are a few different types of accounts that work well for teen investors, each with its unique features.

Teens can invest in stocks, but they need to do it through a custodial account

Some are more simple in nature, and some are custom tailored for teens to invest.

1. Custodial Brokerage Accounts: These accounts allow teens to invest in stocks, bonds, ETFs, and more. While the parent or guardian retains control, the teen can suggest and learn about different investments. These accounts are also known as UTMA accounts.
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2. Custodial Roth IRAs: For teens with part-time jobs or other income, a Custodial Roth IRA can be a great way to learn about retirement savings. Contributions are made with after-tax dollars, and the account grows tax-free, offering a practical lesson in long-term financial planning.
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3. Teen-Focused Investment Apps: Several investment platforms have created accounts and apps specifically for teenagers. These apps often come with educational resources and allow for a more hands-on approach under parental supervision.
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How to Start Investing as a Teenager

Here's a simple guide for teens to begin their investment journey:

1. Open an Account: Choose an app or platform and open a custodial account with the help of a parent.
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2. Fund the Account: Use earnings from part-time jobs, graduation gifts, or cash for chores as initial investment capital.
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3. Learn and Invest: Start with small, manageable investments. Use the educational resources provided by the platform to learn as you go. Start with stocks you know and love and continue to more advanced ETFs, Index Funds, and other diverse investments.
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4. Review and Reflect: Regularly review the investment performance and discuss it with a parent or mentor. This helps in understanding market trends and investment strategies.

Popular Investment Apps for Teens

Several apps have made it easier and more engaging for teens to start investing.

Investing as a teenager is about more than just making money. It's a valuable life skill.

These apps often require a parent to co-sign but give teens a substantial degree of autonomy in managing their investments:

1. Fidelity Youth Account: This app allows teens to buy and sell stocks, ETFs, and mutual funds. Parents can monitor the activity, but teens have the freedom to make their own decisions.
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2. Greenlight + Invest: Greenlight offers a debit card and investment platform for teens. It's a great tool for learning about spending and investing simultaneously.
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3. Acorns Early: Acorns offers an easy-to-use platform for teens to start micro-investing. It rounds up purchases to the nearest dollar and invests the spare change.

Why Should Teens Invest?

Investing as a teenager is about more than just making money. It's a valuable life skill.

By starting early, teens can learn the ropes of the financial world and build a foundation for financial independence in adulthood.

They'll learn about market fluctuations, the impact of economic news on investments, and the power of compound interest.

Even the great Albert Einstein is quoted as saying that compound interest is the 8th wonder of the world.

Another way to introduce kids to growth is teaching them about the rule of 72.

The rule of 72 lets you calculate the interest you need to double your money in a set number of years.

The Importance of Financial Education

For teens, the act of investing is as much about learning as it is about earning.

Parents should take the opportunity to discuss various aspects of investing, including:

• Risk Management: Understanding the risks associated with different types of investments.
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• Diversification: Learning why it's important not to put all your eggs in one basket.
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• Market Fluctuations: Teaching about the ups and downs of the market and the importance of patience.
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• Research: Encouraging teens to research companies and understand the factors that impact stock performance.
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Common Investment Terms for Teens

Navigating the world of investing involves understanding some key terms.

As a teen investor, knowing these concepts will empower you to make informed decisions.

1. Stocks: Ownership units in a company. Buying stocks means you own a small part of that company.
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2. Bonds: Essentially loans to a company or government. When you buy bonds, you're lending money with the expectation of being paid back with interest.
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3. ETFs (Exchange-Traded Funds): Investment funds traded on stock exchanges, like stocks. ETFs can contain various assets such as stocks, commodities, or bonds.
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4. Mutual Funds: Pools of money from multiple investors used to invest in a diversified selection of stocks, bonds, or other assets.
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5. Diversification: The strategy of spreading your investments across different types of assets to reduce overall risk.
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6. Compound Interest: Earning interest on both your original investment and on the interest that has already accrued. It's like interest earning additional interest.
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7. Risk: The possibility of losing some or all of your original investment. Different types of investments carry different levels of risk.
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8. Portfolio: Your total collection of investments. A diversified portfolio can help manage investment risk.
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9. Index Funds: A type of mutual fund designed to track the components of a market index, such as the S&P 500. They offer broad market exposure and low operating expenses.
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10. Rule of 72: A simple way to estimate how long an investment will take to double in value, based on its annual rate of return. You divide 72 by the expected annual rate. For example, at a 6% return, it would take about 12 years (72 ÷ 6 = 12) for the investment to double.

Grasping these terms will not only boost your confidence but also enhance your understanding as you start your journey in the world of investing.

FAQ: Teen Investing

Can a 14-Year-Old Invest in Stocks?

Yes, a 14-year-old can invest in stocks, but they need to do it through a custodial account.

These accounts are controlled by an adult, usually a parent or guardian, until the teen reaches adulthood.

The teen can suggest investments and learn about the market, but the adult holds legal responsibility for the account.

How Can I Invest Under the Age of 18?

To invest under the age of 18, you need an adult to open a custodial account for you.

This could be a Custodial Brokerage Account or a Custodial Roth IRA, depending on whether you have earned income.

Once the account is set up, you can start investing in stocks, ETFs, and other assets under your parent's supervision.

Can Minors Invest?

Minors can invest, but they need an adult to manage their investments until they reach the age of majority.

This is done through custodial accounts, which give minors a chance to learn about investing and grow their funds while under adult oversight.

Conclusion

For teens eager to step into the world of investing, the combination of modern investment tools and parental guidance can provide a powerful start.

By learning and engaging in investment activities, teens can build a strong financial foundation well before they reach adulthood.

This early exposure to the world of finance is invaluable, setting them up for a more informed and responsible financial future.