Investing is one of the key ways of saving money over a period of time. While most people start investing when they get their first payslips, a better way of doing things would be to start investing at a young age, preferably as a teenager. Now, you may think that investing in stocks as a teenager sounds complicated, but it is a lot easier when you get down to it.
Can Teens Invest in the Stock Market?
Stock trading for teens? Is it possible? As a teenager, you would have some idea about the stock market. So, investing may sound like a good idea. However, most brokers allow people to make investments only if they have attained 18 years. While this may be a roadblock for teenagers under 18 looking to begin their investment journeys, you also have other options that you could try to start investing in the stock markets.
How to Encourage Teens to Invest in the Stock Market?
Today, you have many ways to invest in the stock markets, even as a teenager. Although, as a minor, you may need to depend on your parents or guardians to open trading accounts, even though they would be under your name. Moreover, you can access a host of investment and brokerage tools, not to mention educational content that would help you buy a stock. Moreover, these platforms are free, and you will also gain access to debit cards tied to your bank accounts. So, all this should spur more interest to start investing in the stock markets as teenagers.
Smart Teenage Investing: Best Investment Options for Teens
As suggested, you have several options to choose from to start investing as a teenager. However, you may need to set up a custodial account. The best custodial accounts for teenagers include high-yield savings accounts, stock accounts, investing apps, bonds, and mutual funds.
1. High-Yield Savings Accounts
As a teen, you can start by putting your money into a high-yield savings account. While most banks offer savings accounts, various other financial institutions offer high-yield savings accounts that offer higher interest rates than standard savings accounts. However, do note that even with a higher interest rate than traditional savings accounts, high-yield savings accounts still don’t offer as much as other popular investment vehicles such as bonds.
Teens can also buy stocks or equities offered by publicly traded companies. However, they must get to know as much as they can about the stock market before investing in it. When it comes to stock trading for young people, you have many options with which you can begin. Remember that when you invest in stocks, you become a shareholder of that company and earn dividends, not to mention capital gains, as the value increases.
Also, you must open a trading account to invest in the stock markets. As teenagers, you can work with your parents to open a virtual trading account using which you can practice buying stocks. A virtual trading account lets you trade fake stocks without investing money. So, with a virtual trading account, you can learn about how the stock market works and get to experience trading stocks hands-on.
Bonds are one of the most stable investment options for teenagers, although they may not be as exciting as stocks. These investment vehicles are debt securities meaning that you would be lending money to the company that issues them. By investing in bonds, you can diversify your portfolio. Moreover, you get a fixed income via interest payouts as long as you stay invested for a long time.
There are two major funds that you can invest in as a teenager – Mutual funds and Exchange Traded Funds (ETF). Mutual funds are technically investment companies that invest in other companies. So, when you put your money into mutual funds, you become an owner of those funds and get to earn a share of the profits. However, note that you will also be bearing the losses.
Exchange-Traded-Funds or ETFs work similarly to mutual funds where you can invest in several securities at once. The major difference is that you can trade ETFs throughout the day, much like stocks. So, by trading ETFs, you will have more control over their prices. ETFs also have various tax benefits over mutual funds and are cost-efficient too.
Moreover, you can also trade index ETFs that allow you to track them against index funds. You can track the performance of ETFs using various benchmark indexes such as the S&P 500.
The other significant advantage of ETFs is that you can invest small amounts. So, this means that as a teenager, you can start investing small amounts in ETFs and diversify your portfolio instantly.
A Guide to Opening an Investment Account as a Teenager
Long-term investments are crucial to growing your money, and as teenagers, one of your most significant advantages is that you have ample time to keep a long investment horizon. By choosing the right investment vehicle and staying invested for a long time, you can be assured of good returns. You need to do two things to make investments that get you a better yield in the long run.
1. Choose an Account Type
To start investing as a teenager, you need to choose an account type. It would help if you decided on the account type that is best suited for your investment needs. The account type depends on whether your teenage child has taxable income or not.
• If you don’t have taxable income, you can open a custodial account on behalf of your parents. It is a brokerage, trading, or investment account under your parents’ control until you reach a certain age. So, essentially, as a teen, when you open a custodial account, initially, only your parents will have access to that account or the funds until you reach adulthood.
• If your children are older and earning, you can consider opening a custodial IRA or a Roth IRA. While there is no age limit for opening a custodial or Roth IRA, your children must earn or have an income source. Also, Roth IRAs have contribution limits, and you must know the limits before investing.
2. Choose a Good Broker
Opening an account isn’t going to be enough unless you find a good broker. The best brokers are the ones that don’t charge a fee for your kid’s trading account. You must also ensure that the broker does not charge you for opening the account. Many brokers also provide educational content that teaches your kids all they need to know about investing in the stock markets. These may be online tutorials or even fake trading accounts where teens can invest for free.
3. Open an Account
Opening an account is an online process and takes less than 15 minutes. You should have all the necessary documents and information with you to quicken the process even further. The information you will need may include your employment and bank details, among other things.
4. Choose Your Investment
Now that you have opened an account for your teenage child, it is time to invest. You can help your child decide on the stocks they should pick by focusing on the big names as they would be aware of them. You can let your children invest in one or two such stocks and build the rest of their portfolios with index funds.
Ensure that you don’t pick too many individual stocks and stick to portfolio diversification with index funds or ETFs. That way, you don’t end up taking too many risks. After making your investment, you should make sure that you monitor the performance of your stocks regularly. More importantly, you must monitor the earnings and losses rather than those small fluctuations.
If your teenage child wants to start investing in stocks, you might as well open a custodial account. It is among the best ways to start trading in the stock markets, especially at that age. However, do note that many of the popular brokerage platforms don’t offer custodial accounts. So, you must research how to open a custodial account for your teenage children. You could also get them involved in this research and explain that they must have attained at least 18 years to start investing in the stock markets. However, if you find that your teenage child is interested in investing in the stock market, you can convince them that a custodial account is the best way to do it.