Understanding investing is a valuable tool for teenagers. At some point, teens will stop relying on parents for their allowance and start earning money of their own.
When this day comes, if you haven’t already, you should start learning about the basics of investing. When you start this journey, be sure to start small.
Take time to ask questions and research investment strategies. Your parents and other adults can be a vital resource.
Just remember, no one is expecting you to earn billions off your investments overnight. Instead, consider it as a way to dip your toes in the water to learn investment strategies that can continue to expand your wealth in the future.
Why Investing is Important
It is never too early to start investing and making your hard earned money work for you. When you begin your first job you will likely be making a lower hourly wage- which is expected for a teenager.
This is a great time to learn the value of investing. It can only benefit yourself in the future.
Investing is a way to help make a return on your money. There’s no one-size-fits-all investment strategy for teens (or adults for that matter).
Instead, it will provide you with vehicles to utilize to help your money grow- while helping you become a financially savvy adult.
Advantages to Starting Investing Early
There are two huge advantages of investing early: creating investment habits and compound interest.
Young investors have time on their side. Even though money may be tighter due to limited income, if you begin to create the habit of investing early it is likely that it will stick with you throughout your life.
And the best part is that these early investments will grow substantially with compound interest. Compounding interest allows early investors to generate wealth over time.
By allowing the money to work for you longer, it will earn value based on your initial investment and the accumulated interest. Interest on interest- what is not to love about that?
Age Requirements for Investing
Teens as young as 14 can join the workforce in certain states. But even though they are legally earning money, they cannot begin investing on their own until they become an adult at 18.
Instead, a teenager will need to invest through a custodial account.
What Is a Custodial Account?
A custodial account is a bank account or brokerage account that allows a teen to invest under the supervision of an adult. The account is set up to be administered by the adult for the minor’s benefit.
What Can Happen If You Lie About Your Age
If you’re a working teenager who hasn’t hit 18 yet and are considering opening a brokerage account with a “white lie”- think twice before making this grave mistake. When you open a brokerage account before you turn 18 and lie about your age you are committing perjury.
You will be asked to provide your personal information including your social security number and birth date. If you provide false information you are going to be in a sticky situation since you will be trading illegally – making declaring your taxes difficult.
Instead, you should have a trusted adult open a brokerage account on your behalf. The adult does not have to be your parent.
It can be any adult- a friend, relative, or trusted acquaintance. Once you turn 18*, you will receive complete control over your account and the custodian’s access will be restricted.
* The age at which the custodial account is transferred can vary depending upon the brokerage account you select. It can be transferred between the ages of 18-25. If you prefer an account that transfers at 18, make sure that is an option with the account you select.
Where to Open a Custodial Account
If you’re ready to explore your options for custodial accounts, you should consider different banks, brokerages, or other financial institutions. Depending upon your desired type of investing, some will be a better fit than others.
Regardless, you should always compare account fees, deposit minimums, and other important factors.
Charles Schwab is one of the most popular choices for custodial accounts. The company was founded in 1971 and has a trusted history in the investing industry. With minimal fees and strong customer support, it is a fantastic option for a custodial account.
- No minimum opening deposit
- No contribution limits
- Longstanding, trusted history
- No cryptocurrency trading options
E-Trade is the OG online brokerage firm- having paved the way for many others. While their trade costs are not the cheapest on the list, they have many free long-term fund investment options that are appealing to teen investors.
- Access to research reports and other tools
- No account minimum
- Wide selection of investment options
- Higher stock and options trade costs
TD Ameritrade has three different custodial account options, all marketed as a way to save for college. However, the funds are not restricted for educational expenses only.
- High-tech trading platform
- Exceptional customer support
- Powerful research tools
- Higher stock and options trade costs
Fidelity Interactive Brokers
Fidelity is one of the most trusted brokerages when it comes to retirement accounts. These features are the reasons why it is also a great choice for custodial accounts. The wealth of research Fidelity provides for account holders is one of its most appealing features!
- In depth research
- Well respected brokerage firm
- Lower trade fees than other options
- Higher fees if broker assistance is necessary
How To Start Investing
Once you have selected your brokerage account, you can then begin looking at investment vehicles to help expand your investments. From stocks to bonds, ETFs to dividends, there are many opportunities that are now at your fingertips.
An ETF is an exchange traded fund. It is traded on an exchange similar to a stock, and tends to have lower fees than other investment funds.
An ETF combines the best features of diversification of a mutual fund with the ease of trading stocks.
Beginner ETFs to Invest in
- SPDR S&P500 ETF (SPY): This ETF tracks the S&P 500 and is a diversified group across eleven industries with large-cap US companies. It was launched in 1993 and has a track record of success. It included investments from Microsoft, Apple, and Amazon.
- iShares Core S&P (ITOT): This ETF is composed of domestic stocks. It was created by combining small cap stocks and midcap stocks. It includes equities across numerous sectors from companies of all sizes.
- Vanguard Total Stock Market (VTI): This ETF tracks the performance of the overall stock market. It includes micro-, small-, mid-, and large-cap stocks that are traded regularly on the NASDAQ and New York Stock Exchange.
- Schwab US Dividend Equity (SCHD): This ETF tries to track closely to the Dow Jones U.S. Dividend 100 Index. The goal is to invest in high dividend yielding stocks from U.S. companies.
Dividend stocks are investments in well-established companies that have a track record of regularly distributing earnings back to shareholders in the form of dividends. This type of investment can provide a great income stream- or you can reinvest your dividend earnings!
Beginner Dividend Stocks to Invest in
- Best Buy: This well known electronics retailer has been providing investors with trusted dividends for years. It currently pays a dividend yield of 2.6%.
- Texas Instruments: Since 1962, Texas Instruments has been growing dividends for its shareholders. It currently has a dividend yield of 2.3%.
- Kimberly-Clark: A lesser known company, Kimberly-Clark provides household products such as toilet paper, paper towels, diapers, baby wipes, and more. This stock has been around since 1874 and pays a 3.4% dividend.
- First of Long Island: With a high dividend yield of 3.48%, First of Long Island is a great choice for beginner investors. While the name might not be as recognizable, this corporation is a full-service commercial banking institution.
Stocks provide the highest potential for returns out of all the investment vehicles. However, that does come with some level of risk.
The good news is that young investors have time on their side, allowing them to make higher-risk investments that can pay off substantially in the future.
Beginner Stocks to Invest in
- Microsoft: This software giant is one of the most recognizable companies in the United States. It continues to be a leader in software, hardware, and internet services and has a well known history of success.
- Netflix: Streaming services are in demand- and Netflix is leading the charge. What started as a subscription DVD-by-mail service in the 1990s has rapidly become a household name in video entertainment.
- Salesforce.com: The digital world continues to grow and expand, especially for businesses looking to stay on top of their customer management tools. Salesforce CRM is a great stock that has continued to rise on the market.
- Shopify: Shopify is another stock that has taken off due to the rapidly growing digital age. With online shopping expanding, Shopify has become the go-to leader for sales processing.
The Power of Compounding
Increasing wealth is the bottom line for all investors. Everyone’s goals may be different, ranging from quick short-term goals to long-term dreams and retirement, but either way the underlying factor is to increase wealth.
When you use the power of compounding you can watch your money grow. The sooner you begin saving, the greater benefit you will receive from compound interest.
You earn interest on top of the interest you’ve already earned. This is one of the most powerful tools to help build long-term wealth.
While a teen may not be thinking about their future retirement, it is never too early to start working on a sizable nest egg. A Roth IRA is a fantastic way for teens to start saving for retirement with tax-free growth.
The money earned on investments will continue to grow (based on the power of compounding mentioned above). While investing for retirement might not sound as appealing to a teen, the good news with a Roth IRA is that it has more flexibility than other retirement accounts.
The account owner has the option to take out what they have contributed for any reason without taxes or penalties.
Benefits of Opening an IRA Young
Starting an IRA earlier can make a big difference later in life. Let’s examine a hypothetical situation:
At age 15 a teen begins investing $3,000 annually in a Roth IRA account. They continue to do so for the next five years. Upon turning 21 they increase their annual contributions to $6,000.
Then, at the age of 50 they add an additional $1,000 for catch-up contributions. In this hypothetical example, by the time this person reaches 65 years of age they will have a little under $2.5 million in their IRA. You read that right- $2.5 million.
If this person used the same maximum contributions but waited until 35 years of age to start investing they will only have $1 million by age 70. Five years later and a million and a half dollars less in their pocket. But what if they waited even longer? If they didn’t start an IRA until 45, they would only have under half a million dollars in retirement by age 70.
This shows how compelling it is to make investing in an IRA a priority for young people. They can use the power of compound interest to set themselves up with a comfortable retirement.
Educate Yourself Before Investing
Before a teen begins investing it is important that they take time to understand the financial industry. Research is highly recommended.
Teens can use resources like their brokerage firm or a trusted family financial advisor. No one- teen or otherwise should blindly invest. Instead, take time to ensure you’re making decisions that are rational.
Investing as a Minor
Investing as a minor does not have to be difficult. Your trusted custodian can help set up accounts that allow you to make your money earn wealth for your future.
Take the time to gain knowledge about investing, then start working on setting goals for your future. While you don’t have to have your entire life mapped out, beginning with the end in mind can be extremely helpful.