There has never been a better time to invest. Not only are many forms of investment relatively affordable, but the boom in retail investing has also made them incredibly accessible. While many people believe that investing is something for people to do once they start their careers, investing when you're younger is a great way to give your annual returns much more time to create money for you. This leads to the eventual question: at what age can you invest?
In the US, you must be at least 18 years old to open your own account with a brokerage. However, for those who are under 18 that would like to get an early start on financial independence, a custodial account can be opened in the names of the minor and a guardian or custodian.
There is a lot to consider for those considering making their first investment purchase or deposit. Not only are there many different ways to invest that are readily available to those over 18, but there are also options for those under 18 who are able to get a custodian or guardian to help open an account. We're going to look at the details that you need to know about investing early, not only how early you can invest but also what the ideal assets are to hold for those getting an early jump on their financial future.
How Old Do You Have To Be To Invest In Stocks
Whether using a financial advisor, general brokerage, private broker, or when buying stocks online through an online or discount broker, you will need to be at least 18 years old to open an account solely in your name. It's worth noting, however, that this doesn't mean those under 18 are prohibited from investing at all, but generally speaking, any investors under 18 are not allowed to own investment assets like mutual funds, stocks, or other financial assets outright.
How To Invest In Stocks As A Teenager
There are two ways to begin your investment portfolio, and how you need to approach your first investments will depend mainly on your age. Those over 18 will need to look around for a brokerage or online investment platform and simply apply for or open an account in your name. Those under 18 will need a little more work to get their account set up, but it will be largely the same process, just with a little help.
Teens 18 & Older
Since teens 18 and older have reached the recognized age of adulthood, they are recognized as competent enough to open their own accounts with a brokerage or investment platform of their choice. Common choices that make this easy and quick are Fidelity, Schwab, Robinhood, WeBull, and more. In most cases, these brokerages will offer free trades and will make money by selling your order fulfillment to a third party, called pay-for-order-flow. Though there are often fees associated with buying OTC stocks, also known as "penny stocks," or assets sold on overseas markets.
Teens Under 18
For teens under the age of 18, they won't be able to open accounts with brokerages or investment firms under their name alone, and will need to open what's called a "custodial account." A custodial account will be an account with the minor's name on it, as well as an adult, guardian, or other custodial entity that will be given supervisory control over the account.
The process for opening a custodial account will differ by the brokerage. In some cases, particularly where the custodian already has an account with a given brokerage, the custodian may be able to log into their account and, with a few clicks, be well on the way to having their child's account set up.
In other cases, often, when there is no pre-existing account on file, the custodian and minor may need to visit a brick-and-mortar location or one affiliated with the brokerage. This is so that the account holder's identities can be positively verified, and appropriate paperwork signed, and so on. Depending on the brokerage, a physical visit may be needed anyway to help combat fraud and identity theft.
Investing For Teens
Since it's possible for teens both under and over the age of 18, one of the most important things to do is to start investing as early as possible. Thanks to the principle of compound interest, a young teen with a part-time job could invest as little as $100 a month, and if that investment is continued until retirement, it could mean $1 million or more in assets in their investment portfolio.
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Best Investments For Teens
When you're ready to begin investing, you will need to determine what type of asset you're going to invest in. There are many different options, and most of them will be able to provide a far greater return on your investment than simply leaving your money in a savings account, even a high-yield savings account. There are CDs, bonds, several types of funds, and of course, stocks.
Certificates of Deposit
Certificates of deposit, or CDs, are incredibly popular investment vehicles for those just starting out. While they are one of the safest investments from a risk standpoint, they also have the drawback of locking your funds up for a predetermined period. CDs are relatively similar to a savings account, though they pay significantly more interest.
How CDs work is that you'll have a minimum deposit amount, often around $1,000, that you'll need to meet. After that, you'll need to pick your term, which is how long your deposit will be in the account. Generally, the minimum is around 6 months, though you can also find 1-year and longer CDs that will produce much higher returns. The downside is that once you deposit into the account, you generally cannot withdraw the funds until the term is up, and if early withdrawals are permitted, they often come with a significant penalty.
Bonds are relatively nebulous for investors just getting started, but they are much simpler than many realize. Bonds represent a loan to a specific entity, often a large bank or even a government. They are incredibly stable investments that contribute to healthy, diversified portfolios and often provide consistent, periodic returns in the form of the interest the debt-holder pays to the bond-holder. This means by holding enough bonds in your portfolio, you can generate considerable fixed, passive income. Each bond that you invest in, or buy, will have a fixed lifetime.
Funds are generally separated into two different categories that are similar in some ways though quite different in others. The two most popular and common types of funds that you will be able to invest in our mutual funds and exchange-traded funds. These are a great way for an investor to gain exposure to companies of different sizes or "market caps," as well as different investment sectors such as healthcare, tech, and more.
Mutual funds are an investment that is sometimes, depending on the fund, only available through a broker. They operate as a large pool of money put forward by many different investors that is then used to create a diversified portfolio of a particular type or with a particular goal or risk tolerance. Each investor is a partial fund owner, sharing in the profit or potential losses of the fund. Mutual funds are always settled at the end of the trading day, even if they were placed first thing in the morning.
Exchange-traded funds, better known as ETFs, are similar to mutual funds in that many investors invest in a larger group of companies. ETFs are funds that hold stocks of other companies and are managed by large investment professionals or firms, often producing incredible rates of returns. You can buy ETFs in small pieces called shares, just like stocks, and ETFs are traded throughout the day just like stocks are.
Stocks are a way to buy a small portion of ownership, called a share, in a specific company. By buying one or more shares in a company, you become a shareholder and can enjoy gains in the value of that stock as well as other shareholder benefits like voting in company matters. The challenge with stock investment is to find companies that are going to do well, as well as being a good fit for the risk tolerance of the young investor. Stocks are relatively volatile assets and can see significant changes in value in a short time.
Knowing How Early You Can Invest & What To Invest In Is Important
You can invest in stocks as early as you like, provided you have a guardian or custodial presence available to help with account creation and management. Once you hit the age of 18, you'll be able to open and maintain your own investment accounts and manage your own portfolio and assets. It's never a bad idea to begin investing as early as possible, and it can only help you down the road.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.