How to Start Investing as a Minor or a Teenager
Compound interest makes investing as a minor or a teenager a very wise move. Investing is the only way you can also give your money work to do – the script we’re more familiar with is, working for money and then giving money a place to sleep or relax forever, afterward. I mean, saving money.
Nevertheless, there are so many people who have mastered the money game(investing) and are no longer under the slavery of money.
What a great feeling you get as a teenager when you picture yourself having a huge amount of money in your bank account to finally say, “Money isn’t a problem, so I can now focus on the things that genuinely matter to me.”
But the truth is, learning how to invest early as a minor or a teenager is one of the ways to make this distant dream a reality sooner than later, for sure.
Our brains are like body muscles that grow bigger over time when a person lifts weight – therefore, sooner will you be able to take control over your financial life when you start investing early!
Is it possible for me to start investing? I’m less than 18. I’m not rich, I earn a few dollars – that wouldn’t be enough to start investing.
If that sounds like you, read this article to the end to finally know how to start investing as a minor or a teenager.
How Do You Invest When You’re Under 18?
Because teenagers under the age of 18 are not regarded as adults, they are not given the green light to own or trade any form of investment. The only exception is when they’re being guided by their parents or guardians.
A custodial account makes it possible for parents or guardians to invest on behalf of their children till the time they turn 18. The Custodial account comes in two forms: The Uniform Gift to Minor Act(UGMA) and The Uniform Transfer to Minor Act(UTMA).
How Custodial Account Works.
For custodial accounts, there is a fiduciary correlation between the custodian and the minor.
That’s, a custodial account is set up and managed by an adult( whether a parent, guardian or a trusted custodian) on behalf of a minor until the minor is of legal age to manage the account. It’s usually 18 years in most countries and states in the US, but the legal age in some other states is 21.
The two types of custodial accounts; UGMA and UTMA both have the kind of properties a minor can own. The UTMA allows a minor to own properties like patent, royalties, and real estate while the UGMA allows a minor to own stocks, mutual funds, bonds, ETFs, and many more.
Is Custodial Account Tax-Free?
Based on the kiddie tax, a custodial account is taxed using the child’s tax rate.
This is a benefit because the child’s tax rate is usually lower than the parent’s tax rate. Here’s is how a minor is taxed for no earned income.
- Unearned income from $0 to $1,100 is not taxed.
- Unearned income from $1,101 to $2,200 is taxed at the child’s tax rate.
- Unearned income from $2,200 and upwards, is taxed at the parent’s tax rate.
Also, be informed that should the unearned income exceed $15,000 within a year, you would have to pay the federal gift tax.
Therefore, not depositing more than $15,000 per year into a custodial account is the best way to avoid the payment of extra taxes.
Where is the Best Place to Open a Custodial Account?
Here are our top 5 picks to open a custodial account in 2022.
Brokers | Account Minimum | Fees | More Info |
 | $0 | $0 for stocks and ETFs | |
 | $0 | $0 for stocks and ETFs | |
 | $0 | $0 for stocks and ETFs | |
 | $0 | $0 for stocks and ETFs | |
 | $0 | $0 for online stocks and ETFs |
Things You Should Do Before You Start Investing as a Teenager.
Although investing sounds very cool and exciting as you’re securing a good financial future, there is no guarantee that you will be successful in your investment journey.
The only way to make success inevitable is to learn how investing works. Here are some of the things you should do before you start investing as a teen or a minor:
- Involve Your Parents.
I’m sure because of the opening of a custodial account, your parents would definitely know what you’re up to.
All the same, the reason why it’s vital that you tell your parents about your investment goals is that they might have some experience under their belt in investing which you don’t know.
Moreover, after all your diligent research online about investing – getting professional financial advice is very crucial as well.
Your parents might already know a financial advisor to who they would refer you.
- Seek Professional Financial Advice.
The work of financial advisors is to help their clients by proposing the creamiest investments and strategies that would help them multiply their money sooner or later.
Most financial advisors are veterans in the investment world so the advice you would get from such professionals could influence your investment decisions for the better.
Some of the best financial advisors are:
- Start Paper Trading.
Since investing is risky and highly emotional, you don’t want to pour your money down the drain.
That’s why many brokers have virtual trading for you to start practicing. This would show you how much you would have gained or lost if you invested real money.
That means Paper Trading allows you to trade without actual cash to give you a slight feeling of real investing. In Forex trading, paper trading is termed Demo trading. Brokers with the best paper trading are:
- TD Ameritrade
- Interactive Brokers
- TradeStation
- Webull
- E*Trade.
- Understand That You’re Starting a Marathon.
If you want to get the best of investing, then you got to be patient and focus more on the learning process rather than the prize. Don’t be that investor who barely knows what he or she is doing. An investor like that always loses money.
Some people see investing as gambling but in my opinion, the only time it would be considered as gambling is when you just throw your money into the investment without scrupulous knowledge – hoping that you make a profit.
Additionally, statistics show that Americans who have achieved success from investing did so by frequently investing 20% of their income, and then holding their investments for the long term; usually, 2 to 3 decades.
Therefore, obviously, investing is not a fastlane or a get-rich-quick vehicle but rather a get-rich slow vehicle. So be patient, and master it through learning from the most experienced, while you expect success after 15 or 20 years.
The Best Investments a Teenager Should Make.
As a teenager who wants total control of your financial life, there are some massive investment opportunities that are handy for you to indulge in. Here are some of the best investments available for you:
The Stock Market.
If you’ve ever witnessed the atmosphere at Wall Street, NYSE; the big men in suits, moving from pillar to post in a large room with uncountable overhead panels displaying some figures which are literally difficult to understand at first sight, you might feel intimidated and say that you don’t qualify to invest in the stock market.
But far from that, investing in the stock has now been made very easy. However, you may want to know what stocks are. Actually, stocks are very minute equities or shares of a company which when purchased makes you an entitled partial owner of a company.
So for instant, if you buy a stock of Tesla, Inc. right now, you become a shareholder of Elon Musk’s electric vehicle and clean energy company – how intriguing!
Why are shares sold by companies?
Shares are sold by companies in order to raise enough money to expand operations.
For instance, when McDonald’s was started in 1955 in San Bernardino, California; it had very few employees with a single location. Even so, now it has over 200,000 employees and 38,000 locations.
If this has been possible, that’s as a result of the capital its founders were able to raise from selling the shares of the company. Shares are sold by companies to the public via IPO( Initial Public Offering).
There are two common types of stock to choose from – the Growth stocks and Dividend stocks.
Growth stocks of a company usually outpace the market’s growth average. So buying a growth stock would increase your individual stock value over time. Examples of growth stock companies are; NVIDIA Corp(NVDA), Apple Inc(AAPL), Amazon(AMZN), Uber, and Microsoft(MSFT).
Dividend stocks on the other hand are stocks that pay shareholders profits, usually on a quarterly basis. Companies after making profits, reward all shareholders or investors with dividends. The amount of money you could earn depends on the number of shares you have in the company.
A way to profit from dividend-yielding stocks is to reinvest every dividend you’re paid in the early stages of investing. Frankly speaking, dividend-yielding stocks are the best to choose if you want to earn income regularly from your investment( Cash flow).
Some high-yielding dividend stocks are that of Lockheed Martin Corp(LMT), Toyota Motors(TM), Raytheon Technologies(RTX), JP Morgan Chase(JPM), Intel Corp(INTC), and many more.
Suggested Post: How To Get Free Stocks
How to Pick the Right Stocks as a Beginner.
- Practise virtual trading and master it.
- Set clear goals. Are you expecting quick money from your portfolio? Do you want to earn monthly from your portfolio? Do you want to invest long term, perhaps for retirement?
- Stay updated. Immerse yourself in what’s happening in finance, various sectors and many more.
- Learn the fundamentals. Understand market cap, gross margin, ROI, ROA, ROE, P/E ratio, etc, as well as the history of every company you have interest in.
- Don’t be emotional. The fact that a particular company has a sexy name or logo, or you love their products doesn’t mean you should invest in their shares if data shows that the company is doing poorly.
Use Finviz to check company assets, profit, and other helpful data before you invest.
Roth IRAs
Individual Retirement Accounts are there to help you invest for retirement and Roth is one of the types of IRAs. This retirement account is very similar to the well known Traditional IRA, the only difference is that owning a Roth IRA is tax-free while taxes are paid for owning a Traditional IRA.
For United Kingdom residents, the accounts that are similar to Roth IRA are the Self-Invested Personal Pension “SIPP” and the Individual Savings Account “ ISA”.
Canadians also have the Tax-Free Savings Account “TFSA”. You would have to check the legal age in your province to create your TFSA. Non-residents can also create a TFSA as long as they have a valid SIN.
Even Though investing for retirement in your teens may be the last thing to do, it is a way to secure a joyous retirement without financial stress.
The Best Roth IRAs can be found on;
- Wealthfront
- Interactive Brokers
- SoFi
- Fidelity
- E*Trade
- TD Ameritrade and many more.
Mutual Funds.
As a teenager who has less experience in investing, the most appropriate way to reduce the risk associated with investing is by investing in a Mutual Fund.
But what is a Mutual Fund?
Mutual Fund is when many investors bring their money together to invest concurrently in diverse types of assets such as Real Estate, Stocks, ETFs, Bonds, Commodities, etc, and the fund is always managed by an investment company of experts.
Looking at the diversification of mutual funds, many investors tend to like it very much. Again, Mutual Funds are also easy to liquidate; very easy to exist or join. If you want to skip the stress involved in picking your own stocks to build your portfolio, Mutual Fund is for you.
What Factors Should Be Considered Before Selecting a Mutual Fund?
To maximize your chances of positive returns in the future, there are some factors you should consider before selecting a mutual fund. Have a look at some of the considerable factors:
- Go for a fund with the lowest expense ratio. The expense ratio is calculated by dividing the fund’s expenses or operating cost by the fund’s asset or value. Between 0.5% and 0.75% is considered to be low, hence the best. Avoid funds with an expense ratio above 1.5%. A lower expense ratio means you shall get higher returns for relatively lower investment costs.
- Consider no-load funds. No-load funds are those funds that charge no fees or commission when you buy or later decide to sell your mutual fund shares.
- Don’t be blinded by only the past performance of the fund. A good performance in the past doesn’t mean that a fund will perform well in the future.
- Experience matters. Look for fund supervisors who are veterans, because it’s money you’re putting in this thing. You want someone who could make the best investment decisions on your behalf.
High-Yield Savings Account.
Creating a high-yield savings account is the only way to go when you want substantial growth of your money. Unlike traditional savings accounts that averagely have an interest rate of 0.06%, high-yield savings accounts have 0.4% – incredible!
So if you’re a teenager who wants to slow down on investing in the stock market, mutual funds, and others, then this type of savings account is for you.
Best Places To Create A High-Yield Savings Account.
Final Words.
The road to financial freedom is literally long, so the earlier you start, the better. Nobody is too young to invest, with the help of custodial accounts.
Do you know if you were to start investing $500 per month at age 16, that money would be over $900,000 by the time you turn 60 suppose there was an average annual return of 5%? This is how compound interest would work magnificently on your money if you start investing early!
But how can you invest that much as a teenager? Start a side hustle, some require no financial investment at all.
Learning how to save more money to invest can also be extremely difficult, especially if you’re earning a low income. But there are some tips to help you save enough on low-income. I hope that you found value from this article. Wishing you more dollars and freedom!
Manuelo is an entrepreneur and a personal finance nerd. He is the founder of Dollars And Freedom. An expert in side hustles, online gigs, and everything about making money. His works have been featured on major financial publications, such as Business Insider, GoBankingRates, Investopedia, Entrepreneur, and more. When he’s not busy with his blog or writing for others, you’ll catch him hanging out with loved ones or reading books on stoicism and self-development.
