Words and concepts like investment, the stock market, mutual funds, and other financial terms may not seem relevant to people under 18. Many people believe that financial matters are only important for “adults” and children should not be concerned with them.
People who think like this could not be more wrong. The fact is that financial literacy is not only important but crucial for young people, especially teenagers. Now more than ever, young people have started showing interest in their finances and expressing desires for financial independence.
As a 17-year-old or even younger, you may be wondering how you can invest as a teenager. The good news is that it is not impossible. This guide will take you through everything you need to know about investing as a teenager and prepare you for the financial world.
You can start investing sooner than you ever realized once you understand the options available to you and the ways that you can invest. Our guide will take you through the different types of investments a teenager can make, the investment accounts available for teens, and many more.
Why should you invest as a teenager?
This article is not only for teenagers looking to save money and create money by investment. It is also crucial that parents play a role in helping their teens invest. Teenagers cannot legally participate in the stock market on their own, so they need an adult guide if they want to start investing.
The stock market is not the only option for investing as a teenager, though. Investing is a broad term that covers all kinds of financial activities. The basics of investment involve putting money into something in hopes of a financial return.
Investment takes patience and financial planning, so it is not for the faint of heart. It is, however, one of the best ways to build wealth. This is especially true for people who start investing as teenagers.
The money you make off your investments can be used to purchase homes, plan for requirements, pay for college, and many other things. So, why should you be interested in investing as a teenager? Or why should you, as a parent, encourage your child to invest?
The biggest advantage of investing as a teenager is that you have time. Starting investing early gives you more time to not only gain knowledge about investing and finances but also time for your potential returns to build up. This is thanks to something called compound interest.
Compound interest is the ability for money to earn its own money with time. The principle of compound interest is dependent on how long you allow investments to sit, which is why it is best to start investing as early as possible.
Teenagers that start investing at a young age can save up to ten times the amount that middle-aged people can, even if they are making the exact same investments. Therefore, investing as a teenager is incredibly beneficial as it allows people to build wealth that they can use later in life.
Investing as a teenager also gives young people the advantage of understanding key principles and systems of finance early on. Financial literacy can be underrated sometimes, but it is an essential skill for adulthood. Many people end up learning about financial literacy practices when they are in their thirties or later, which sets them back by decades.
With sound financial knowledge at a young age, teenagers are preparing themselves for adulthood. Understanding and engaging in financial practices from a young age also reduces the number of people that will become reckless, irresponsible, or anxious finance holders as adults.
Financial literacy and early investment build confidence in teenagers and let them understand how money works and, more importantly, how money can work for them.
What is virtual trading and is it useful to teens?
Virtual trading is also known as paper trading. The basics of paper trading provide a way for people to learn about investments and practice how to buy and sell stocks without using any real money. This provides a risk-free learning environment that is ideal for young people who are just starting to get interested in investment.
Paper trading works by letting investors make use of stock market simulators to practice buying and selling stocks. There is no real money involved so people have room to make mistakes and learn from them without suffering devastating losses.
The goal of paper trading is to teach people how to generate high stock market returns. The stock market simulators create a completely realistic market that reflects the risks, rewards, and competition that is prevalent in real-world stock markets.
For a new investor, especially a young one, virtual trading provides a means of gaining trading experience with no risk. This is invaluable as it prepares new investors for the market thoroughly and intensely. It lets young investors make their mistakes in a safe environment before they start staking real money on the market.
Since the stock market usually involves very long-term investments, paper trading and virtual trading programs can only teach investors so much. This is because you cannot spend years on a paper trading program. Rather, the goal of paper trading is to give new investors the tools and knowledge they need to get started in the market.
Reasons why teens should make use of stock simulators
As we have explained what paper trading is and how stock simulators work, here are three concrete reasons why stock simulators are a great idea for your teen and why they should utilize these programs before they start trading.
Hey, get a comprehensive investment education.
Stock market simulators are not designed to only create virtual markets that people are just thrown into. Most platforms that provide virtual trading options are fully committed to teaching and educating people about stocks and trading.
To this extent, these platforms don’t only provide market simulators but also provide a wealth of resources that teach new investors how the market works and where to start. These resources include books, articles, tutorials, and many other means of education.
New investors can form communities and ask questions about the market so that they can learn as they trade. The skills of investment aren’t just expected to fall on the new investors, but rather they are given an atmosphere dedicated to teaching them all about investments and stocks.
From the first step of buying stocks to stock market principles like holding, stock simulators guide new investors through the processes involved in the stock market. This is why these simulators are not just a practice ground but more similar to a training ground.
They can try out risky or inventive strategies.
When it comes to investing in stocks, there are times when investors have to make high-risk moves in the hopes of high rewards. These kinds of strategies are not always the best moves to make, and a new investor might not know when to go all in or when to hold back.
Strategies such as trading options, trading with foreign currencies, shorting stocks, and more take time and skill to perfect. Investors cannot afford to attempt these strategies when they have thousands of dollars and more on the line.
That is why stock simulators are such a great solution to that. With a paper trading program, a new investor can try out all kinds of strategies and get a first-hand look at what the results would be. This way, they can learn from their mistakes and be able to decipher when to make a risky move and when to practice restraint.
They can learn intangible skills.
Many people don’t know that, besides financial knowledge and skills, one of the most important things to master when it comes to investments is keeping your emotions in check. Being highly emotional or not being able to regulate your emotional responses can ruin you as an investor. Virtues like patience and perseverance are crucial to what makes an investor a good investor. With a stock simulator, new investors can learn to identify and manage the emotions that arise throughout the trading journey. This skill of temperance will become invaluable when dealing with the inevitable ups and downs of trading.
What should you invest in as a teenager?
Deciding on where to start with investments can be difficult as there are many options for people to begin with. The best way to go about investing is to diversify your portfolio by engaging in different types of investments.
These different investment types provide varying risks and rewards so you must understand the ways each of these investments works before engaging with them. A good set of investments for teenagers will include all the different types of basic investments to get them started in each regard.
Here are some of these fundamental building blocks of an investor’s portfolio.
Stocks
Individual stocks, or equity as they are sometimes called, are the most popular way to generate wealth through investments. Stock investment is a high-risk and high-reward investment model that is easy to explain, especially to teenagers.
Buying stocks from a company means that you are buying a small piece of ownership of that company. Only publicly traded corporations can be placed on the stock market, and individual members of the public can purchase stocks in these companies.
People that buy stocks of companies are called the shareholders of the company. The shareholders with the highest number of shares control the company and its decisions. As a small-scale shareholder, you do not have any say in the running of the company, but you do earn dividends on the shares you own.
Companies pay shareholders dividends that correspond to the number of shares they own. Shareholders can also make money with their shares through capital gains. Capital gains depend on the value of the stocks per share and are highly volatile.
Teenagers and young people just starting with investing can invest very small amounts in one or two companies and buy stocks as a way to learn about the stock market. People new to investments are advised to choose companies that they are familiar with because this motivates them to follow up with the company.
Buying stock in a company makes you a participant in the successes and failures of that company, even if you only invest a small amount in it. The amount of money you make from your stock depends on how much you invest as well as the value of the stock, which is directly related to the value of the company.
When a company is growing in profit, people are more likely to be interested in the company’s stock, which drives up the value of shareholder shares. If the company is going through a rut or having trouble generating profit, shareholders may begin to sell their shares, which devalues them.
There are two main types of stocks. These are growth stocks and value stocks.
Growth stock
These are stocks in a company that provide returns depending on the company’s growth. When you are investing in the growth stock of a company, your focus should be on the company’s revenue and profit and what plans the company has for driving growth in these two areas.
The growth of a company results in increased profit which leads to an increased value of shares as more people gain interest in the company.
Value stock
Value stock in a company is stock that provides returns through the alternating values of the stock over time. Value stock returns depend on the assumption that even if a company is doing poorly, this will prompt investors to buy the cheap stock, which will ultimately increase the value of the shares.
Value investors are much more calculating, and the risk with value investing is higher than with growth investing.
Dividends are the primary way that shareholders receive returns for their shares. A company may opt to give out dividends at whatever intervals it pleases. This may be monthly, quarterly, annually, or any other option of their choice.
Investing in dividend-yielding individual stocks as a teenager is the best way to acquire wealth long-term with little to no effort. The amount you will receive in dividends varies with the stock you buy so it also allows for studying market data and learning about which stocks are the most profitable.
You can use your dividends as spendable income or reinvest them in the same or different stocks. There are no rules on what dividends must be used for. The investment income made by a teenager is theirs to use. As a young person, you can get started with stocks by using investing apps and doing accurate research on the market and the companies you want to invest in.
Mutual funds
Investing in individual stocks can be very risky because investors put all their money into only one of two companies. If those companies suffer any failure, the investors are left with nothing. The high volatility of individual stock investing means that investors need to find other ways to protect their money.
Small changes in the market can lead to rapid changes in the company’s profitability. For example, if a competing company develops a new or superior product, profits for the company may reduce. Trend cycles can also influence the profitability of a company.
This is where mutual funds come in. Mutual funds are the best way to diversify your investment risk as they allow you to have stakes in multiple companies. By investing in a mutual fund, or many mutual funds, you are spreading your financial risk and opening yourself up to rewards from different stocks and other types of investment.
A mutual fund works by gathering the money of many different investors and using it to invest in a variety of companies and properties. With a mutual fund, investors are exposed to anything from dozens to thousands of stock performances.
Mutual funds also invest in other types of investments such as real estate, bonds, and other types of assets. With a mutual fund, investors do not have to solely depend on the performance of one company to secure a profit. In fact, if one of the companies that they are invested in suffers a loss, investors in a mutual fund may not even notice or be severely affected.
Mutual funds allow investors to diversify across hundreds of stocks in the fund so that they are constantly seeing profits in their investments. Most mutual funds work on an active management system or administration.
An actively managed mutual fund means that the investment decisions and stock choices are made by a fund manager or a team of fund managers. A percentage of all profits made from the investment in the fund goes to the manager which is how they make their own income.
The presence of fund managers in mutual funds takes the responsibility off the investor to research and study a company before investing. The fund managers vet and verify every company included in the fund so that investors can trust whatever companies are presented to them.
As a new or young investor, this is very helpful as the fund managers are investment experts and can advise you on investments and protect your money. Of course, as a minor, you will not be able to directly trade until you turn 18 but that doesn’t mean that you cannot learn before then.
Exchange-traded funds
Exchange-traded funds, or EFTs are very similar to mutual funds. Like mutual funds, they provide the means to diversify your investments and allow you to invest in different companies, properties, and assets. But, there are a few key differences between mutual funds and ETFs.
The first difference is that the cost of mutual funds is always the same, no matter when in the trading session you order them. Mutual fund prices change once a day only, which is at the end of trading hours for that day.
With exchange-traded funds, investors can trade on exchanges so the prices can fluctuate throughout the day. Exchange-traded funds are similar to stocks in this way.
Another difference between the two is in the expenses. With mutual funds, there are different share classes depending on investment size, and each class has its own annual expenses, investment minimums, and sales fees. With ETFs, this is different.
ETFs give all investors the same expenses no matter where they invest or how much they invest. There is also a fixed investment minimum, which is the price of one share of a company. With micro-investing apps, this may be slightly different because they offer investments in fractional shares so you can trade with very little money, but with traditional trading, this is the case.
The last big difference between exchange-traded funds and mutual funds is that most ETFs are index funds. This means that while mutual funds are managed by individual managers or teams of managers, ETFs are not.
An exchange traded fund works by making use of an index of company stocks which it tracks constantly. The fund lets people invest in the stock of companies based on that index. This makes index funds cheaper than human-managed funds because there are no middlemen that need to be paid for services.
While index funds allow investors to keep more of their returns, there is also the disadvantage of not having managers to consult. While some fidelity mutual funds may be indexed, they are very uncommon, and it is ETFs that are most usually indexed.
Exchange traded funds pay dividends to investors so that investors can compound the returns of the fund as well as the income and save even more money. This is what makes ETFs a great option for teenagers looking to secure wealth at a young age.
Bonds
Bonds are a means of debt security and are usually just one aspect of a robust investment plan. Bonds essentially function as the investor lending money to the company or whatever property they purchase the bond from.
Bonds are one of the most stable investment options as they have very low volatility. For young people, bonds may seem boring compared to the thrilling ups and downs of the stock market, but it could be beneficial to include bonds in your teenager’s investment plan.
Bonds are invested in a company or government entity and are paid back at predetermined interest rates. The size and term of the bond determine how much the investor will make in the long run. The timeframe of a bond is fixed, as is the payment amount, so investors get a fixed income payment at fixed intervals.
Bonds are a very reliable way to invest, and while they do not offer very high rewards, they also provide very few risks. They are a safe way to invest alongside other investment plans to ensure that there is always an investment earnings stream.
What are the investment account options for teenagers?
Whether you want to trade stocks, join mutual funds or ETFs, or engage in any other type of investment, you will need an investment account. If you are 17 years old or younger, you will have to use one of these options for your account.
A direct investment account can only be operated by someone 18 years of age or older. However, this does not mean that there are no options for people under 18. We have three options here for how someone younger than 18 can still participate in investing with an account.
Jointly owned brokerage account
A brokerage account is a typical account needed for investments and trading. In a standard brokerage account, there is only one name listed as the account owner. Since a 17-year-old cannot operate this account, they will have to go for something different.
With a joint brokerage account, two or more people can be registered as the account owner and sit on the title. The people on the account title all have control of the account’s assets. This account can be used by business partners, spouses, and family members, like parents and children.
Making use of a joint brokerage account allows a teenager to participate in the investment decisions made on the account and accumulate wealth for themselves through investing. With their parent’s supervision, they can participate in the stock market and make investments for themselves.
Joint brokerage accounts can be opened on investing apps and investing apps for kids specifically allow parents to fully understand the role they play in the account and the ways that they can help their children learn more about investments.
Custodial account
This is an account type that is specifically for minors. A custodial account is registered in a minor’s name with an adult as the custodian of the account. Many parents create accounts like this for their children and they can be used for investment.
A custodial investment account can hold all kinds of assets, such as exchange traded funds, stocks and bonds, insurance contracts, and many more. This is one of the best account types to open for your child if you want them to start investing.
The money in the custodial account is controlled by the custodian, but that does not mean that you have to keep the child in the dark about it. As your child learns more about investments and slowly starts investing, you can keep them abreast of the minimum balances in their account.
The child or teenager that owns the account cannot access it or the assets within it personally until they reach the age of majority in the state where they live. This may be 18 in some states, but in some states it may be 21, or even 25 years old.
Some people conflate custodial accounts with trust funds, but they are very different. A custodial account allows the custodian to control and manage the assets for the child easily. A trust fund is a more complicated system to set up and has its own merits outside of investments.
Custodial accounts also have the benefit over joint brokerage accounts in that all the assets in the account belong to the minor only. With joint accounts, the money belongs to both owners and must be shared between them.
The custodian of the account can carry out transactions with the account on the minor’s behalf until they are old enough to claim the account. In ideal situations, this lets minors observe and contribute to the investments in the account while the adult manages it for them and hands it over when it’s time.
Individual retirement account (IRA)
This is the only type of account that minors can own on their own without any adult supervision or control. An individual retirement account lets minors invest any of their earned income into their retirement fund for the future.
Earned income can range anything from a proper summer job to percentages of a child’s allowance. Any means by which a minor makes money can be put into an IRA for investment into retirement.
Minors can contribute a maximum of $6,000 per year into their individual retirement account and get a tax-advantaged investment opportunity to save up for retirement. This type of account can turn out to be very useful to minors.
There are two main types of IRA:
Traditional IRA
A traditional individual retirement account lets people deposit money into the account without it being taxed. This can be referred to as ‘pre-tax’ income because the money is taxed once the person withdraws it from the account.
The money can be withdrawn without any penalty when the account owner reached retirement age. If the owner wants to withdraw money from the account before that time, they will have to pay a penalty which will likely be a percentage of the amount being withdrawn.
Roth IRA
The Roth IRA is the opposite of traditional individual retirement accounts. Money can only be deposited into a Roth IRA once it has already been taxed. This has the benefits of being able to withdraw and spend the money without any taxation once it reached maturity.
It is more advisable for minors to make use of Roth IRAs since they are not making high amounts and are paying even less in taxes. Minors may not even have to pay any taxes at all depending on their income level so taking advantage of the Roth IRA prevents them from having to pay tax on the money later.
Benefits of having a high-yield savings account (HYSA) as a teen
For young people and minors, a high-yield savings account is another great avenue for investment. Some people may not consider these savings accounts as a means of investment but they actually are. Though the returns are not as high as trading stock, they are worth considering for teenagers.
For young people who do not have any experience with managing money, a savings account is a great introduction to the concept of saving and investing. Savings accounts introduce teenagers to the concept of compound interest on a small scale and teach them about the benefits of saving.
Savings accounts are also a completely hands-free investment method. All they have to do is deposit money in the account. They don’t have to worry about vetting stocks or what types of funds to invest with. Parents can have joint ownership of savings accounts with their children and teach them about money management.
High-yield savings accounts help minors earn more money than typical savings accounts would so they are still learning about the rewards of investing. The interest rates of a high-yield savings account may vary between financial institutions so parents should research for the best ones.
Some things that parents should look out for when choosing an HYSA are the interest rate offered, the minimum balance requirement, and any required fees for opening the account.
Micro-investing apps and how teenagers can use them
We mentioned the micro-investing app earlier, but what exactly are those? These apps have become more popular with younger generations lately and some parents have wondered if that is a good way for their kids to get into investing.
Micro investing apps can be a fun way to introduce young people to investments. To use these apps, people have to connect the app to their credit or debit cards. The app then takes every transaction they make, rounds it to the nearest dollar, and automatically invests that rounded amount.
For example, if someone purchases a snack for $2.25, the app automatically takes the remaining 75 cents of that last dollar and invests it for them in the options of their choosing.
Users on the app can make selections for where they want their investments to go and then all they have to do is spend money and the app handles the rest. Every investment may be less than a dollar, but the amount compounds with time, especially if you make purchases frequently.
For teenagers, this could be a great way to introduce them to investing and could be a stepping point to more complex and higher-paying investments with time. Instead of letting money sit in their accounts and do nothing, micro-investing apps help them make more money with their change.
Some micro-investing apps also allow users set rules for extra amounts to be invested based on where they purchase things. All in all, they are not a bad option for introducing young people to investment.
Tax requirements for minors
With all of the account options for young people to participate in investing, the question of tax liability has to come up. Many people overlook the fact that they may have to pay taxes when they start involving their children in investing.
Even if the child is making use of a custodial account, there are situations where tax requirements will need to be met. These situations include if the accounts are used to sell shares which are called capital gains, or when the account receives dividends for stocks.
For custodial accounts, the ‘kiddie tax’ applies. Kiddie tax is the tax requirement for accounts owned by minors. These tax requirements are set in place to prevent adults from taking advantage of the accounts of minors while also allowing minors to enjoy low levels of taxation.
The tax requirements restrict taxation on unearned income and work as follows:
- The first $1,100 of unearned income is tax-free as it is subject to the kiddie tax deduction.
- The second $1,100 of unearned income is taxed at the child’s tax rate.
- Any amount higher than this is taxable to the custodian of the account and taxed at their rate.
For jointly owned brokerage accounts, the tax liability can be a bit more complicated. Since the account is jointly owned, taxes may have to be settled by both parties. Sometimes the brokerage stipulates that only the primary account holder pays the tax but this is not as common.
More commonly, state laws govern the payment of tax in joint accounts. For accounts owned by a parent and child, the parent is responsible for filing tax returns and finding out what taxing methods the state has regulated for the account.
The options for how states determine taxation for joint accounts are as follows:
- Tenants by entirety
- Joint tenants
- Tenants in common
Can you invest in stocks at 17?
As a young person, specifically a teenager, there are many options for you if you want to start investing. Teenagers should not only be encouraged but actively advised to participate in the investment. Starting investing and wealth accumulation early sets them years ahead of their peers and predecessors and guarantees that they will make more money faster.
Investments can seem like a complicated topic but parents need to remember that it is never too early to ensure that their child is financially literate. It is not difficult to start your teenager off on the path to investment and help them cultivate a genuine interest.
Your child will thank you in the future when they start seeing returns for their investment. They will also be grateful when they are in the corporate world and they have a keen understanding of finances, developed from a young age.
