My father used to joke that he didn’t want his kids to go off to college for two reasons: 1) because he wouldn’t get to see them and 2) because when he would see them, it meant they needed money.
Most parents dream of their children being financially savvy and somewhat independent by the time they leave for college. But with schools becoming ever more competitive and students vying to get into the best AP classes and extra-curricular activities, children and teens have less time than ever to get a part-time job that can save a bit of money.
Luckily, there are options which are less time-consuming and more education-packed, such as investing in stocks.
How Old Do You Have to be to Invest in Stocks?
In most of the more economically developed countries, such as the United States, Canada and the United Kingdom, the minimum legal age to start trading stocks is 18. That means that even if your precocious self-starter wants to learn hands-on how to invest in stocks and save money, no stockbroker will allow them to open an account.
The good news is that while your child cannot use stock trading to directly invest in their own future, you can.
In fact, you may have already seen this before. You go to a sweet sixteen, quinceañera, or bar mitzvah and, while all the guests are handing the birthday kid checks and air pods, there is that one person who proudly presents a piece of paper that says he opened a stock trading account in the child’s name, with a starting contribution of $100. Unlike the kid, the parents are usually appreciative.
This account, called a custodial account, can be given at any time, even as early in life as a baby shower. It is a great way to make a long-term investment in a child’s future that they can then access when they reach adulthood.
How Does a Custodial Account Work?
There are a few options when it comes to opening custodial accounts for minors. In the USA, the most common ones are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). In the UK, there is the Junior Stocks and Shares ISA (which is subject to a limit but is free from U.K. tax on gains), the Junior Investment Account and even a Junior Self-Invested Personal Pension (SIPP). Canada answers with its own Registered Retirement Savings Plan (RRSP).
These accounts are quite simple and allow you open a stock trading brokerage account for a minor with a stockbroker. Once you open the account in the child’s name, anyone can contribute money to the account. But once the money is in, it cannot be taken out.
These funds can be used to buy and sell stocks, options, bonds, exchange-traded funds (ETFs), cash, annuities, and mutual funds. One of the differences between a UGMA and a UTMA account, for example, is that a UTMA account can also hold other assets such as real estate and art.
Up to $15,000 a year can be “gifted” into the account. However, no one can access that money, including the child’s parent or guardian, the account opener, or the child themself until they reach the age of 18. In many cases, a UTMA account allows for maturity up to 25 years.
The custodian of the account is the only one who can execute trades with the broker. Any attempt by the minor to contact the broker to enter a trade will be futile. The exception to this rule is the Canadian RRSP, which a child can open themselves with parental consent.
Another option is a 529 savings plan or Canada’s Registered Education Savings Plan (RESP). These work the same as UGMA and UTMA accounts, but the money can only be used for college or university and the associated costs. (To be clear, the child can withdraw the money at age 18 for non-education-related purposes, but it will be taxable and incur a 10% penalty.) So, if you are one of those people who tends to doubt the wisdom of a typical 18-year-old, a 529 savings account ensures that the money from the stock investments is used for higher education. However, keep in mind that available investment products are more limited in this type of account than in UGMAs or UTMAs.
There are two types of 529 plans: one is a prepaid plan in which the parent or custodian essentially sets the amount of college expenses and pays in advance. In the other type of plan, you can invest unlimited funds for your child’s higher education.
Factors to Consider When Investing for Minors
There are a few things to consider when buying stocks for children, not the least of which are what to invest in and how much to invest. This really all comes down to your goals for the child.
You will most likely want to start off by investing money in the shares of larger, “blue chip” companies such as Microsoft, Alphabet (Google), Facebook, etc. These tech behemoths are not likely to go out of business any time soon, so they are more of a safe bet that you will get to keep your principal investment and get a modest return over the years.
If your primary goal for the child is that he or she can access the funds at adulthood, then this is a good strategy. However, if your main goal is that your child become a stock trading guru, then you may want to contribute a bit less to the account and get more into the nitty-gritty of stock trading, investing in more volatile stocks.
You also want to consider spreading the funds across various assets, such as stocks and bonds, by what is called diversification. Diversifying the investment portfolio can help your child learn more about investing and risk management, because it ensures that you do not take on too much risk by investing all your money in one asset. In other words, do not put all your eggs in one basket.
You can also diversify your portfolio by spreading your investments around a certain asset class. For example, you could diversify your investments within stocks by investing in technology companies and retail fast-food chains.
Another thing to be aware of is taxes and exemptions. In the US, for example, any contribution to the account of up to $15,000 a year is exempt from a gift tax. Similarly, the first $1,100 of earnings are tax-exempt. The next $1,100 in earnings are taxable, but at the child’s tax rate. Once the account earns over $2,200 a year, it will be taxed at the adult’s tax rate.
But that’s for UGMA/UTMA accounts. Remember the 529 savings plan? Provided that that money is used strictly for educational purposes, it is all tax-free.
Final Thoughts
At the end of the day, opening a stock trading account for a child is a great way to teach kids how to trade stocks, how to be responsible, and can also provide them with a start in life.
So, if you ever decide to open a stock trading account as a gift to a minor, you probably will not be the life of the party. But the life of the child will be better for it.
FAQs
Is Investing Under 18 Illegal?
The legal minimum age to invest is 18. That means that financial brokers, including stockbrokers, will only open an account for individuals 18 or over.
What is the Best Investment for a Teenager?
There are many great investments for teenagers, especially in stocks. However, if you are below the age of 18, a legal adult will need to open the account and manage it for you.
How Should a 13-year-old Invest?
A 13-year-old legally cannot invest, but an adult can open an account with a broker and manage the account for him or her.
Can a 14-year-old Invest in Bitcoin?
Being under the required minimum age of 18, a 14-year-old cannot invest in Bitcoin. However, an adult can open a trading account with a broker and execute the trades on his or her behalf.