How to invest as a teenager
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.
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 should teenagers start investing?
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 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 start investing as a teenager in 4 steps
There are no age restrictions to start investing – so you don’t need to wait until you’re 18 to put money in the market. However, you will likely need the help and supervision of an adult.
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 down payment on a future home, building a retirement nest egg 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 instead 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 also need a parent or guardian to help you create an account.
Your two main options are:
Custodial account: An adult, typically a parent or guardian, opens a custodial account on a teen’s behalf at a broker. The money and control of the account transfer to the teen when they reach legal age (18 or 21, depending on the state).
Invest with earned income: 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 or 529 plan. This is a great way to learn about investing with real money, but with some guardrails in place.
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. Fidelity’s Youth Account, for instance, is open to children aged 13 to 17 and has no minimum balance requirement to get started. You also have the option to kickstart your investments with fractional shares for as little as $1.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are another popular option for custodial accounts. Joint brokerage accounts are another option where the adult and teen co-own the account.
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.
Start with small amounts until you become comfortable with the process, and remember to regularly review and adjust your portfolio as needed.
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. Wealthbase and Wall Street Survivor are two popular stock market trading games.
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, checking out articles from trustworthy sites like Investor.gov and taking free online courses on investing fundamentals.
What teenagers 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 can parents support their teenage 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.
Bottom line
Investing as a teenager can be both a rewarding and educational experience. It can help them build wealth, learn about the markets and develop good financial habits that will serve them well throughout their 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.
