How to Invest as a Teenager

Investing can be beneficial to people of all ages. However, the younger you begin to invest, the more returns on investments you can take advantage of over that period of time. Contrary to popular belief, you don’t need to be over the age of 18 to get started. 

There are a number of ways that teenagers can invest. While most methods require an adult to supervise the investment, starting to invest as a teenager can give you the experience needed to make better investments in the future. Not only are earlier investments good for your eventual returns, but early investment education can also act as an invaluable skill for the future. 

How to Invest as a Teenager

There are many different options that make investing for teens simple and attainable. While parents can put money into a trust for their children, teenagers can also start using their own funds at a young age to start earning some money from it. A custodial account is one of the more popular investing options for a teenager, but there are plenty of other options to start investing at a young age. The following are some of the most popular options for teens who want to invest early. 

High-Yield Savings Accounts

A high-yield savings account (HYSA) is a savings account that offers a higher interest rate than most standard accounts. The higher interest rate allows for the funds in the account to grow more than a savings account with a lower interest rate. These HYSAs are offered by banks and credit unions and typically have a $0 minimum balance to open, allowing teenagers who don’t have much cash to open an account. Most importantly, this teaches kids a good habit—always keep some money in savings.

CDs

Certificate of deposits (CDs) are a type of account similar to other savings accounts that earn interest. However, with CDs, you are required to keep your funds in the account for a certain period of time before you can claim the interest and withdraw your funds. This period can be anywhere between a few months to multiple years. You can then redeem the CD and get the funds back, which includes the interest earned. The money in a CD is insured by the FDIC, which is why they are considered risk-free and make a good investment for teenagers who are new to the investing marketplace. This is a good first step for kids so they have an idea of how this process works.

Stocks

Owning stock is a simple way for teens to start earning some money. When you own stock, you essentially own a part of that company, which allows you to earn dividends and money through capital gains when the stock’s value increases. Teenagers can start by opening a virtual trading account, which allows them to practice buying and selling stocks without risking any of their own money. From here, teenagers can start buying and selling actual stocks of companies they are familiar with in order to ease into this investing option. If a child gets interested, they can learn a lot in a short time, even surpassing their parents in terms of stock aptitude.

Bonds

Bonds are another stable way for teenagers to invest. When you buy a bond, you are lending money to the company or government entity that issued the bond, which is why bonds are considered a sort of debt security. The bond issuer makes interest payments on the bond over time and essentially provides the owner with a fixed income. This is a good way to teach kids to set up for future income, planning, layering and buying into sensible investments.

Funds

There are 2 types of funds that teenagers can invest in: mutual funds and exchange-traded funds (ETFs). These types of funds are considered pooled investments, which means that all of the investor’s money is pooled together. The difference between a mutual fund and an ETF is that ETFs trade like stocks throughout the day, while brokerages purchase mutual funds at the close of each trading day and deposit them into your account.  

How to Open an Investment Account for Teens

Teens under the age of 18 aren’t usually able to open investment accounts on their own. However, parents or guardians are able to open most accounts on behalf of their teenager. There are several investment accounts that are opened for teens which allow them to start saving money and accessing investments before they are legally able to open an account on their own.

Open a custodial account: A custodial account allows an adult, or “custodian,” to open an investment account on behalf of the teen. Once open, the adult can invest for the teen or along with the teen. With a custodial account, the adult has control over the investment choices and account entirely until the child turns 18 or 21. The age at which the teen can take control of the account is dependent on the state. 

The 2 types of custodial accounts that are the most common are UGMA and UTMA. These accounts are similar in most ways, however, their differences are in the assets they can hold, the maturity date and the termination date. The termination date is the age at which the funds must be distributed by.   

UGMA: Uniform Gifts to Minors Act accounts have a maturity and termination date of 18 years old. Cash, securities and insurance policies are all assets that are allowed to be transferred with this type of account. The expenses that are eligible to be paid for by the assets in the account can be anything that benefits the child and there are no contribution limits. The first $1,050 contributed to the account is tax free, but the second $1,050 is subject to being taxed at the child’s tax rate.    

UTMA: A Uniform Transfer to Minors Act account has a maturity date of 25 years old. The termination date is typically 21 years, but can be 25 for some accounts. Any kind of asset can be transferred and any expense that benefits the child is eligible for use of the funds. There are no contribution limits for these types of accounts. Similar to the UGMA, the first $1,050 is tax-free, but the next $1,050 is taxed at the child’s rate.  

The Benefits of Investing for Teens

When most people think about the concept of investing, they imagine million-dollar deals in the skyscrapers on Wall Street. However, the truth is that investing is an essential skill that everyone can take advantage of, no matter their income. Some of the benefits of investing for teenagers include the following. 

Starting a good habit: Many adults struggle with budgeting and saving. Teens who learn to put a small percentage of their paycheck or allowance away in an investing account can teach them how important it is to avoid living paycheck-to-paycheck as an adult. 

Saving for the future: Graduating high school comes with a number of expenses that teenagers may not be prepared for, especially if they plan to move out right away. Investing early can help your teen manage adult expenses (like rent, medical bills, insurance premiums and more) with less stress in the future. 

Planning for college: College is a major expense that most young adults save for years to afford. If your teen plans on going to college, you can help them limit the amount of money that they must take out in loans by helping them grow their money early through an investment account. 

Planning for big purchases: College isn’t the only thing that teenagers save up for. From their first car to the prom dress of your daughter’s dreams, you can use large financial incentives to help your teen save more and learn about the market in the process. 

Compare Brokerage Account Options

Benzinga offers insights and reviews on the following investment account providers. You may want to begin your search for the right brokerage account for your teenager using the links below. 

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