Investing is a great idea at any age, but the sooner you start, the longer your money has to grow, and you don’t need to be an adult to begin your financial journey.
There are many ways you can start investing as a teen, and getting a jump now will not only generate higher returns over time, but it will equip you with the knowledge and discipline to make smart investment decisions for the rest of your life.
Here’s how to get started.
5 Ways To Invest as a Teenager
The first thing to look at are the kinds of investments you can use to build wealth as a teen. Here are the most common five.
1. High-Yield Savings Accounts
A high-yield savings account (HYSA) offers a higher interest rate than most standard savings accounts, allowing your funds to grow faster over time. Many banks and credit unions have no minimum balance requirement to open one, making it a convenient option if you’re a teen without a lot of money to start. HYSAs are typically insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), making them a risk-free investment option.
2. Certificates of Deposit
Certificates of deposit (CDs) are similar to savings accounts and can offer even higher interest. However, they have a fixed maturity period that can range from a few months to several years before you can access the funds and claim interest. The money in a CD is also FDIC-insured up to $250,000.
3. Bonds
Bonds are another stable investment option for teenagers. When you buy a bond, you’re lending money to a company or government, making it a form of debt security. In return, the bond issuer pays interest over time, providing a predictable income. Investing in bonds can be an ideal way to learn about long-term financial planning and passive income generation with lower risk.
4. Stocks
When you buy a stock, you own a part of a company, which can earn you money if the stock’s value rises. Stocks can offer greater returns than HYSAs or CDs, but they also come with much greater risk. To get your feet wet, you can open a virtual trading account to practice trading without risking real money. Once you’re confident, you can transition to investing in actual stocks and gain real-world experience.
5. Funds
There are two basic types of funds to know: mutual funds and exchange-traded funds (ETFs). These are pooled investments where money from multiple investors is combined to build a diversified investment portfolio. You buy and sell shares in them like with a stock, with a few key differences: 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
If you’re under 18, you typically can’t open an investment account on your own, but a parent or guardian can open one for you. Here are some of your options.
Custodial accounts
A custodial account allows an adult to open an investment account on behalf of a teen. The adult can invest for or alongside you. The adult has entire control over your investment choices until you turn 18 or 21, depending on the state.
The 2 most common types of custodial accounts are Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). They’re very similar, but their differences are in the assets they can hold, and their maturity and termination dates, which are the ages when the teen gets full control of the assets in the account, depending on the state they live in.
Uniform Gifts to Minors Act (UGMA): UGMA accounts have a maturity and termination age of 18 years. They allow asset transfers such as cash, securities and insurance policies. Funds in the account can be used for any expenses for your benefit, and there are no contribution limits. The first $1,350 contributed to the account is tax free, while the second $1,350 is subject to being taxed at the teen’s tax rate.
Uniform Transfers to Minors Act (UTMA): A UTMA account has a maturity age of 25 with a typical termination date of 21 years. The account can hold any type of asset including patents, art or real estate; and the funds can be used for any expenses for your benefit. There are no contribution limits, and the tax treatment is the same.
Investing Platforms
Right now your options to invest directly in the stock market are limited, but Fidelity Investments offers a brokerage app called Fidelity Youth that’s designed to help teens between 13 and 17 invest with real money.
Your parents have to open the account, but it’s not a custodial account. You control how much money you invest. Your parents will have access to all your activity so they can give you guidance if you need it. When you turn 18, you have the option to convert your Youth account to a regular Fidelity brokerage account.
Fidelity also allows you to buy fractional shares. If a full stock price looks too expensive, you can buy a part of it for as little as one dollar, and there is no minimum balance requirement.
Remember though: If you buy stocks, and their prices fall, that money is gone, and you need to prepare yourself for that loss.
Benefits of Investing for Teens
Build smart habits: Adults often struggle with saving and budgeting. Learning how to save just a small percentage of your allowance can teach you how important it is to start saving early.
Prepare for future expenses: Graduating high school comes with various expenses you may not be ready for, especially if you intend to move out right away. Whether you’re buying a car, renting your first apartment or tackling college expenses, investing early can reduce major financial stress.
Planning for college: College is a major expense. By investing early, you can grow your funds over time and reduce your reliance on loans.
Compare Brokerage Account Options
Benzinga offers comprehensive insights on investment account providers. You may want to begin your search for the right brokers using the links below.
Frequently Asked Questions
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Yes, a 16-year old can invest in stocks under the supervision of an adult, typically through a custodial account or through a qualified brokerage.
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High-yield savings accounts and certificates of deposits are low-risk and an ideal starting point for teens new to investing.
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A virtual trading account can be a good starting point to get an idea about investing. It’s important to learn as much as you can about a company before you make a trade. Start with companies you’re familiar with.
