If you think you're too young to start investing, think again!
While most states require you to be at least 18 years old to buy stocks, there are several options available for younger investors. Today, we'll go over some of the opportunities available to investors of different ages and explain the benefits of investing early. No matter what age you are, you are never too old or young to begin your investing journey!
- The key to investing is compound interest. The earlier you start investing, the more your investments will grow over your lifetime.
- Most states will allow you to invest on your own if you are 18 or older. If you meet the minimum age requirement, there are several steps you can take to better prepare yourself for investing in the stock market.
- If you do not meet the minimum age requirement, your parent(s) or guardian(s) can open custodial accounts in your name.
What is the Stock Market?
The stock market is a collection of markets and exchanges worldwide where retail and institutional investors can buy and sell shares of publicly traded companies, such as Apple, Target, Netflix, and American Express. Most trading in the U.S. happens on the NASDAQ (National Association of Securities Dealers Automated Quotations) and NYSE (New York Stock Exchange), two of the largest exchanges in the world. Traders and investors buy and sell stocks to earn a profit using different strategies, such as day trading, buy-and-hold, and options trading.
Why Start Investing at a Young Age?
The earlier you start investing, the more compound interest will work in your favor. In simple terms, compound interest is the interest you earn on money previously earned as interest.
For example, let's say you start by investing $1,000 in the stock market. You contribute $500 each month for 30 years and get 7% annual returns on an average year. 30 years later, your total contribution of $181,000 is now worth $574,376.97 or 3.17x your initial investment.
The more money you add to your investment portfolio, the more growth it will experience over your lifetime. Even if you decide to invest only $1,000 today and not contribute anything else for the next 30 years, you will end up with $7,612.26 at the end, or 7.6x your initial investment. That is the power of compound interest.
Additionally, investing young lays the groundwork for a healthy money mindset to develop financial literacy early on. In a survey by Bankrate.com, less than 4 in 10 Americans can afford a $1,000 unexpected expense. Developing financial literacy at a young age allows you to learn more about the value of investing and money management so you can overcome tumultuous and uncertain times.
How Old Do I Have to Be to Start Investing?
The minimum age to open a brokerage account without a parent or legal guardian in most states is 18. However, some states have a mandatory minimum age of 19 or 21 for investing.
The reasoning for this is because you cannot enter an enforceable contract as a minor. When you buy or sell stocks, you are signing an agreement or contract to make the sale. That is why brokers will not allow you to open an account with them until you reach your state's legal minimum investing age.
However, if you are a minor, you can start investing with the help of a parent or legal guardian. We will cover some of your options later in this article, so keep an eye out!
I'm Old Enough - How Do I Get Started?
1. Look Into Tools and Resources
If you meet the minimum age requirement, start by doing some research on the stock market. With the rise of the Internet, there are many free online resources you can easily access.
I got started by googling the basics, such as how to buy stocks, which brokerage firms were the best, what companies to invest in, etc. I also regularly watch finance updates on YouTube, listen to current events podcasts, and joined Reddit and Discord communities focused on investing. Additionally, I talk to my friends about the stock market all the time and stay updated on political and economic news.
There are no shortages of resources you can tap into to get started, so try out as much as you can!
2. Choose a Brokerage Firm
Once you get more comfortable with stocks and investing, start looking for a brokerage firm to open your first investing account with, such as Webull, Fidelity, Charles Schwab, M1 Finance, etc. Each firm offers different benefits for investors, so make sure to find one that works best with you.
A few things to look out for are the fees, the education section, the UI/UX, and the ease of use. Some brokerage firms charge service fees, exception fees, or regulatory fees that others might not charge. Some may have comprehensive education sections, including free webinars and courses. Others have better mobile designs and are much more user-friendly.
Of course, you do not need to stick to only one account, but it can make a difference in your initial experience. For example, I started by opening an account with TD Ameritrade. But, I had to pay a few miscellaneous fees, which left a sour taste in my mouth. As a result, I moved on to Robinhood for a while, but now I currently use Webull for the bulk of my investments. Webull is my preferred broker because I like the mobile experience, technical tools, and ease of use.
3. Conduct Due Diligence
If you want to invest, you need to some research first. Similar to playing on a sports team, you need to come up with a game plan. Your strategy does not need to be fully fleshed out but start thinking about your goals and how you will get there. For example, what companies do you want to invest your money into? How much time and effort do you want to put into your investments? How much cash do you have for your initial investment?
There are many options you can choose from when you invest in the stock market. You could invest in individual companies or invest in a basket of securities through an index fund or exchange-traded fund (ETF). If you want to be more hands-on, start by looking into individual companies you are interested in, such as Amazon, Costco, and Square. If you would like to take a less time-consuming approach, look into an S&P 500 fund or a Total Market fund.
Two popular methodologies used in the stock market today are technical analysis and fundamental analysis. Depending on how interested you are in stock trading, you could use one or both strategies extensively.
Technical analysts focus on statistical trends, such as past price movement and trading volume, to identify patterns and trends for predicting future market prices. Popular signals used to determine when to buy or sell stocks include support and resistance levels, candlesticks, trendlines, moving averages (MA), and momentum indicators. Generally, technical analysis is used extensively by short-term traders. But, you can use it to find good entry positions for long-term holds as well.
Fundamental analysts focus on evaluating a company's intrinsic value and future growth potential by using data such as a company's financial statements, leadership team, and economic and industry conditions. Other indicators to research include a company's price-to-earnings (P/E) ratio, debt-to-equity (D/E) ratio, and earnings-per-share (EPS). Investors typically use fundamental analysis for buy-and-hold strategies. However, short-term traders can use it to bolster their trading strategies.
4. Buy Stocks
Once you've decided what type of assets you want to buy, whether it's individual stocks, index funds, or ETFs, it's time to make your first investment. To buy a stock, an investor will usually use either a limit order or a market order. If you use a limit order, you set the maximum price to buy a security.
For example, if Tesla is trading at $686, but you think it's worth $650, you would set a limit order of $650 per share. Your order will not go through unless Tesla falls to $650 or less. With a market order, you are a price-taker, meaning you will buy the stock at whatever price it is trading at in the market.
When I first started, I only set market orders because I did not know better. However, I later realized that the market fluctuates all the time. With a bit of patience and attention to detail, I can get a rough idea of the support and resistance levels of the stocks I want to buy. So, instead of buying stocks at the market price, I now use limit orders almost exclusively to buy stocks at the right price for me.
However, the caveat with limit orders is that they do not execute every time. If you set a price that is too low or unrealistic, your order might never get filled. Sometimes, I make the wrong assumption, so the stock price either never falls to my desired price target or falls lower, meaning I overpaid.
5. Manage Your Risk
Anything you invest in will come with risks no matter how safe the assets are perceived to be, which is why you need to learn how to manage your risk. For most investments, the higher the reward potential is, the higher the potential risks.
As an investor, think about your risk appetite. How much risk are you willing to take on? Are you the type of person who worries about losing money? If you are risk-averse, focus more on index funds or blue-chip companies because these investments tend to be more stable and predictable. If you are a risk-taker, look into growth stocks, which are usually more volatile and unpredictable but grow faster than the rest of the market.
I Don't Meet the Minimum Age Requirement - What Are My Options?
If you are legally not old enough to open your own account, do not worry. You could always ask a parent or legal guardian to set up a custodial account for you. We'll cover some of your options below.
A custodial account is a brokerage account owned by a parent or legal guardian on behalf of a minor. While the parent or guardian manages the custodial account, it is legally held in the minor's name until they reach their state's minimum age to start investing.
The Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) are two types of commonly used custodial accounts. Once funds get deposited into these custodial accounts, they become the property of the beneficiary. That means the funds can't be accessed or withdrawn until the minor is of legal age.
Uniform Transfer to Minors Act (UTMA)
Under a UTMA account, a parent or legal guardian can hold properties, such as real property and real estate, under their child's name until they become of legal age. However, some states, such as Vermont and South Carolina, do not allow UTMA accounts.
A UTMA account could also affect the beneficiary's eligibility for need-based financial aid. The Free Application for Federal Student Aid (FASFA) looks at both the student's and parent's income to determine financial need. If your children plan on applying to FAFSA, this is something to pay attention to.
The main benefit of a UTMA account is that how the money gets distributed and spent is flexible. It does not need to be used only for educational purposes and can be managed on behalf of the beneficiary for up to 25 years.
Uniform Gift to Minors Act (UGMA)
A UGMA account is almost identical to a UTMA account with a few minor differences. It is a type of custodial account limited to financial products only, such as stocks, bonds, cash, mutual funds, etc. You cannot hold any properties on behalf of your child under this account. All states allow UGMA accounts, but they will typically be terminated after 18 years, meaning the beneficiary will gain full legal ownership when they turn 18.
If you have a paid part-time job or internship, you can contribute to a Roth IRA with the help of a parent or guardian. A Roth IRA is a tax-advantaged retirement account that allows you to put in post-tax income that will then grow tax-free over time. However, one caveat is that you cannot contribute more than you make if you are a minor. For example, if you work at Target over the summers and earn $2,000, then you can contribute $2,000 max to your account for that year.
The younger you start contributing, the more compound interest will work in your favor. Additionally, you can take out your initial investment to cover educational expenses or buy your first home without being penalized. However, as the Roth IRA is a retirement account, you need to be at least 59 1/2 before withdrawing your investment for other purposes.
529 Savings Plan
A 529 college savings plan is a unique savings vehicle for parents saving for their children's future education. Similar to a 401(k), a 529 plan is a tax-advantaged account that allows investors to set aside money for future educational expenses. If used for qualified expenses, you will be able to withdraw your investment tax-free.
Qualified expenses could include tuition and mandatory fees, books and school supplies, electronic school equipment, and on-campus and off-campus room and board. Most institutions in the U.S. will accept 529 plan savings, including community colleges, universities, vocational schools, and some foreign institutions.
The Bottom Line
While there are some limitations for minors, you can start investing at any age. No matter how old or young you are, the best time to start is now. The younger you start investing, the more time you'll have to build wealth. So, don't hesitate. Do some research on your own or with the help of family and friends, then go open an account! Your financial future awaits!
Frequently Asked Questions
Can I buy stocks at 16?
Yes, but you would need to open a custodial account with the help of a parent or legal guardian. Your parent or guardian will then manage your custodial account until you are legally able to invest in your state. Then, once you turn 18 or 21, you can access and manage your account on your own.
Can you lose money in stocks?
As with any investment, you can lose money by buying stocks. While the stock market historically trends upward, there have been bear markets and market crashes. So remember to manage your risk and stay informed on your investments.
Can I buy one share of stock?
Absolutely. Many brokerage firms today offer the ability to buy fractional shares. With fractional shares, you can purchase stocks with as little as $20 in your account. While buying one share of stock seems pointless, you have to start somewhere. If you have limited capital or are just beginning, there is nothing wrong with buying one share of stock at a time.