Investing For Teens: How To Invest As A Teenager

There are no age limits to investing, so teenagers have the opportunity to start early and set themselves up for future success. The benefit of starting at a young age? More time in the market, which has historically shown to lead to higher long-term returns.

However, getting started is often the hardest part. While everyone’s investing journey will look different, there are a few basic steps that teens and their parents can take to get a successful start on growing wealth for the future.

Why teens should consider starting to invest today

Many people don’t start investing until they’re in their 20s or 30s. But getting a head start comes with distinct advantages. Investing early can help you develop financial literacy skills, learn about risk management and build a strong foundation for future financial success.

Other benefits of investing as a teenager include:

• Time in the market: With time on your side, you can leverage the power of compounding to grow your investments significantly over the years.
• Higher potential returns than savings: Investment returns can outpace the interest earned in a traditional or high-yield savings account, leading to faster wealth accumulation.
• Cushion against inflation: Investments can provide returns that outpace inflation, preserving the purchasing power of your money.
• Creates good financial habits: Investing early can help instill good financial habits, such as regular saving and long-term financial planning.
• Higher risk tolerance: A longer investment horizon allows for a higher risk tolerance, potentially leading to higher returns.

How to invest as a teenager in 4 easy steps

Most teens can’t directly open their own brokerage accounts — typically, you need to be at least 18 years old for that. But with the help of a parent or guardian, teenagers do have a way to start investing in the markets.

Here are four steps to get started.

1. Learn about investing

Before you start investing, you’ll need to understand the basics. This includes learning about different types of investments, including stocks, bonds, mutual funds and exchange-traded funds (ETFs). It also means understanding key investing concepts like risk tolerance, diversification and compounding. There are many resources available to help you learn about investing, from books and online courses to investment games and financial news sites.

2. Set your investment goals

Identify what you hope to achieve with your investments. Are you saving for a big purchase like a car, college tuition, a home of your own or just aiming to grow your wealth? Having clear goals will guide your investment decisions and help you choose the right investments. Remember, investing is not about getting rich quickly but growing your money over the long term. For short-term goals, a high-yield savings account might be more appropriate.

3. Open an investment account

To start investing, you’ll need a brokerage account, a type of account that allows you to buy and sell investments.

If you’re under age 18, you’ll need a parent or guardian to open a custodial brokerage account on your behalf. The money and control of the account transfer to you when you reach legal age (18 or 21, depending on the state).

Your main account options are:

• Custodial IRA: If a teen has earned income from a job, they can use some of that money to invest alongside an adult in a custodial Roth individual retirement account.
• A 529 plan: 529 plans provide tax advantages for savings that are intended to be used to pay for education expenses.
• Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts: These accounts are often used to save for educational expenses, but they have fewer restrictions about how you use the funds than 529 plans.
• Joint brokerage account: With this option, the adult and teen co-own the account, so it is not technically a custodial account. Because it offers no tax advantages like IRAs, 529s, UGMAs and UTMAs, there are no restrictions on how much money you can contribute and when you can access it.

When choosing a custodial account, consider factors such as fees, investment options and customer service. The best online brokers offer account features such as no minimum deposit requirement, no account fees and no commissions for online stock and ETF trades. 

Some brokers offer accounts specifically designed for minors. Fidelity’s Youth Account, for instance, is open to children aged 13 to 17 and has no minimum balance requirement to get started. It also offers a Roth IRA for kids.

When choosing a custodial account, consider factors such as fees, investment options and customer service. When establishing an account, you’ll need to supply certain identification information, including your name, address, birth date and Social Security number, and the adult custodian will also need to provide their personal details.

4. Select your investments

Once you have an account, you can start selecting your investments. Many experts recommend starting with stocks of companies you’re familiar with, and gradually diversifying your investments over time.

Another strategy you might consider is purchasing some of the top index funds, which offer immediate diversification. This way, you don’t have to worry about selecting the “perfect” stock.

You don’t need a lot of money to get started. Many brokers let investors purchase fractional shares — a small slice of a company stock — for as little as $1. That way you don’t have to wait until you can afford to buy a full share of a high-priced stock. You can simply buy it a few fractions of a share at a time.

How teenagers can learn the basics of investing

Learning about investing doesn’t have to be complicated. In fact, it can even be fun. Stock market games and virtual trading are two popular risk-free ways to learn the ropes.

• Stock market games: These are all about friendly competition. You’ll go against friends or the public to select the best-performing investments and manage a portfolio. The focus isn’t so much on trading but rather on long-term investing throughout the game.
• Virtual trading: This involves actively monitoring the market and virtually trading securities, not for real profit, but in a simulated environment. It generally uses the actual trading platform of a broker to familiarize you with available tools. Primarily, virtual trading serves as a rehearsal for real trading and a way to explore a platform. Webull and Interactive Brokers both offer easy-to-use paper trading accounts where you use virtual money to simulate real trades.

There are plenty of other resources available that can help you understand the basics of investing and develop a solid foundation of financial knowledge, including reading some of the best books about investing for beginners.

What teens should consider before starting to invest

Investing involves the risk of losing some or all of your initial investment. The degree of risk varies depending on the type of investment. For example, stocks are generally riskier than bonds, but they also offer the potential for higher returns. It’s important to understand these risks and to only invest money that you can afford to lose.

Don’t let the risks stop you from investing, though. Instead, learn to manage risk effectively by investing in low-cost, broadly diversified index funds, setting a budget for your investments and maintaining a long-term perspective.

Before starting to invest, it’s helpful to ask yourself the following questions:

• Do you have money that you can invest, and are you prepared to lose some or all of this money if your investments don’t perform as expected?
• Are you willing to commit time to learning about investing and managing your holdings?
• If you’re under age 18, are you willing to work with a parent or guardian to set up a custodial account?

If you can confidently answer ‘yes’ to these questions, you may be ready to start your investing journey. Just remember, investing is often a long-term commitment, so it’s important to continue learning and adapting as you go.

How parents can support their beginning teen investors

Parents play an important role in helping their teenagers navigate the world of investing. For starters, they can provide basic financial education and instill good financial habits. They can also help set up a custodial account, which allows children under the age of 18 to invest in the markets.

Parents can also provide emotional support and guidance by helping their teens make informed decisions and learn from their mistakes. Most importantly, parents can model good financial behavior and demonstrate the importance of saving, investing and managing money responsibly.

FAQs about investing as a teenager

• Can I invest as a 16-year-old?
  

  In order to invest as a minor, you’ll need a brokerage account. A custodial account requires an adult to open it on the teen’s behalf. The custodian technically has control over how the money is invested, though they are not allowed to withdraw funds. But ideally, you and the adult work together to decide how to manage the account.

  Once you reach adulthood (age 18 or 21, depending on the state), the account transfers into your name and you assume full control of the investment decisions. Some brokerages allow minors to open their own account (Fidelity’s Youth Account is one example) and make investment decisions within it.

• Can I buy shares in my child’s name?
  

  Some adults choose to do this informally by earmarking certain investments within their own brokerage accounts for a child. This also means that your tax rate is used to determine what (if anything) is owed to the IRS. Adults can transfer assets to a child into a custodial account, but there may be tax implications for the child on this “unearned income” if the amount exceeds certain IRS thresholds.

• At what age should I start investing?
  

  The earlier you start investing, the more powerful the results. Compound interest paired with the stock market’s history of delivering solid returns over long periods of time work as a great multiplier for even small amounts of money. For example, a child who invests $1,000 when they’re 10 years old will end up with roughly $189,000 when they’re 65 years old, assuming 10 percent annualized returns, about the average return on the S&P 500 index over time. Play with Bankrate’s compounding calculator to see how much your money could grow over time.

Bottom line

Investing as a teenager can be both a rewarding and educational experience. It can help you build wealth, learn about the markets and develop good financial habits that will serve you well throughout your life. While investing carries risk, with the right knowledge, tools, and guidance, a teen investor can navigate the investment landscape confidently. Remember, the key is to start early, invest regularly and stay the course.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

— Bankrate’s Dayana Yochim contributed to an update of this article.