What is the Minimum Age to Invest in Stocks?
Investing in stocks can be an excellent way to grow your wealth over time, but there are some age requirements to be aware of before getting started. In most cases, you need to be at least 18 years old to open a brokerage account and start investing in stocks on your own.
Legal Age Requirement for Opening a Brokerage Account
To open a brokerage account in your own name, you must meet the legal age requirement of 18 years old. This is because a brokerage account is a legal contract between you and the brokerage firm, and minors cannot enter into legally binding contracts.
Once you turn 18, you can open a brokerage account with most major brokers, such as Fidelity, Schwab, or Vanguard. You’ll need to provide some personal information, including your Social Security number, address, and employment details, and fund your account before you can start investing.
Investing in Stocks as a Minor
While minors can’t open brokerage accounts in their own names, there are still ways for them to start investing in stocks. One option is through a custodial account, which is an investment account managed by a parent or guardian on behalf of a minor.
Custodial accounts allow minors to own stocks, bonds, mutual funds, and other investments, with the adult acting as the custodian until the minor reaches the age of majority (usually 18 or 21, depending on the state). The minor is the beneficial owner of the assets in the account, but the custodian makes all the investment decisions until the minor comes of age.
Another option for teens interested in investing is to use a specialized investing app or platform designed for younger investors. These apps often have lower minimum investment requirements and educational resources to help teens learn about investing basics.
Custodial Investment Accounts for Minors
Custodial investment accounts are a popular way for parents or guardians to invest on behalf of a minor child. These accounts are set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on the state.
How Custodial Accounts Work
In a custodial account, the adult acts as the custodian and manages the account for the benefit of the minor. The custodian can make investment decisions, buy and sell securities, and withdraw funds for the minor’s benefit, but they have a fiduciary duty to act in the best interests of the minor at all times.
Once the minor reaches the age of majority (again, either 18 or 21 depending on the state), the assets in the custodial account are transferred to their control. At this point, the former minor can use the funds however they wish, whether that’s continuing to invest, paying for college, or something else entirely.
Types of Custodial Investment Accounts
There are a few different types of custodial investment accounts to choose from:
- Custodial brokerage account: A regular brokerage account opened by an adult for the benefit of a minor, allowing for investments in stocks, bonds, mutual funds, and other securities.
- Custodial Roth IRA: A Roth IRA can be opened for a minor who has earned income, allowing them to save for retirement from a young age. Contributions are made with after-tax dollars, but growth and withdrawals in retirement are tax-free.
- Custodial 529 plan: A tax-advantaged investment account designed to save for a child’s future education expenses. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses.
Investment Account Options for Teens
In addition to traditional custodial accounts, there are a few investment account options specifically designed for teenage investors.
Fidelity Youth Account
The Fidelity Youth Account is a brokerage account that allows teens as young as 13 to start investing. The account is owned by the teen, but a parent or guardian must be a co-owner on the account until the teen turns 18.
With the Fidelity Youth Account, teens can invest in stocks, ETFs, and Fidelity mutual funds. They also get access to educational resources and a mobile app to help them learn about investing and track their portfolio. There are no account fees or minimum balances, making it an accessible option for teens just starting out with investing.
Custodial Roth IRA for Kids
For kids who have earned income from a job, a custodial Roth IRA can be a great way to start saving for retirement at a young age. In a custodial Roth IRA, the child is the account owner, but an adult acts as the custodian until the child reaches the age of majority.
To contribute to a custodial Roth IRA, the child must have earned income from a job, whether that’s from a part-time job, babysitting, mowing lawns, or something else. The maximum contribution is the lesser of the child’s earned income for the year or the annual IRA contribution limit ($6,000 for 2022).
One of the main benefits of a custodial Roth IRA is the power of compound growth over a long period of time. By starting to save and invest at a young age, kids can take advantage of decades of tax-free growth and set themselves up for a more secure retirement.
The Benefits of Investing Early
While 18 is the minimum legal age to start investing in stocks on your own, there are significant benefits to getting started even earlier with the help of a parent or guardian.
Harnessing the Power of Compounding
One of the biggest advantages of investing early is the power of compound returns over time. When you invest money, you earn returns not only on your initial investment but also on your accumulated returns from previous years. The longer your money is invested, the more time it has to compound and grow.
For example, let’s say you start investing $100 per month at age 20, earning an average annual return of 7%. By the time you’re 60, your investment would have grown to over $280,000, even though you only contributed $48,000 out of pocket. That’s the power of compounding at work.
| Starting Age | Monthly Contribution | Total Contributions | Account Value at Age 60 |
|---|---|---|---|
| 20 | $100 | $48,000 | $281,375 |
| 30 | $100 | $36,000 | $135,044 |
| 40 | $100 | $24,000 | $55,902 |
As you can see, starting to invest just 10 years earlier can make a huge difference in the size of your nest egg, thanks to the power of compounding. That’s why it’s so beneficial to start investing as early as possible, even if you can only afford to contribute a small amount each month.
Developing Healthy Financial Habits
In addition to the financial benefits, investing early can also help kids and teens develop healthy financial habits that will serve them well throughout their lives. By learning about concepts like budgeting, saving, and investing at a young age, they’ll be better equipped to make smart financial decisions as adults.
Investing can also teach valuable lessons about risk, reward, and the importance of long-term thinking. By experiencing the ups and downs of the market firsthand, kids can learn to ride out short-term volatility and stay focused on their long-term goals.
Overall, while the legal age to start investing in stocks is 18, there are many benefits to getting started even earlier with the help of a custodial account or other investment options for minors. By harnessing the power of compounding and developing healthy financial habits from a young age, kids and teens can set themselves up for a lifetime of financial success.
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