How Old Do You Have to Be to Buy Stocks? All You Need to Know

Investing in the stock market is a key strategy for building wealth, but many people wonder at what age they can start buying stocks. Understanding the age requirements and available options for young investors can set the foundation for financial success early in life. Whether you’re a parent looking to invest for your child, or a young individual eager to dive into investing, this guide will cover everything you need to know about when and how you can begin.

Read this article because it clearly outlines the legal age requirements and investment options for young individuals, providing a solid foundation for entering the stock market.

I’ll answer the following questions:

• How old do you have to be to buy stocks independently?
• What are custodial accounts and how do they work?
• Can you buy stocks if you are under 18?
• What are the tax implications for minors investing in stocks?
• How can parents invest in stocks for their children?
• What types of custodial accounts are available for minors?
• What should you consider before buying stocks for children?
• What happens to a custodial account when the minor reaches the age of majority?

Let’s get to the content!

Age Requirements for Investing in Stocks

The legal age to independently engage in stock trading is tied to the age of majority, which is typically 18 in most U.S. states, but can be 21 in others. Before reaching this age, teenagers must navigate certain restrictions if they wish to invest in stocks. 

Young people reading this article — you NEED to understand these rules BEFORE you open a brokerage account! Many brokerage firms require evidence of age and a linked bank account, which must comply with the firm’s terms of service, often stipulating that account holders must be at the age of majority. For teenagers eager to get started, this can mean looking into custodial accounts where a parent or guardian maintains control over the trading activities.

Age of Majority

In most parts of the U.S., the age of majority is 18. This is the age at which an individual is considered an adult and can open a brokerage account in their own name. The age of majority is crucial as it signifies when a person legally gains control over their financial decisions and investments. For those under this age, there are still options to get involved in the stock market, which we will explore.

Custodial Accounts

For minors, one primary way to invest in stocks is through a custodial account, which must be opened and managed by a parent or guardian. This type of account allows the adult to buy stocks on behalf of the minor, with the account being handed over to the minor when they reach the age of majority.

Standard Brokerage Account Requirements

To open a standard brokerage account, one must meet the age of majority requirement. This account type allows individuals to buy, hold, and sell securities like stocks, bonds, and ETFs. Brokerage firms often require proof of age, a verified bank account, and other personal information to open an account.

State-Sponsored Investment Accounts

Some states offer investment accounts that can be initiated for minors. These accounts might be used for saving for college or other expenses and often come with tax advantages or other benefits.

Educational Expenses Accounts

Accounts like Coverdell ESAs or 529 plans are designed specifically for saving for educational expenses. While they can invest in stocks within these accounts, the primary purpose is to fund educational costs, and they come with age and contribution limits.

How to Buy Stocks Under Age 18

For individuals under 18, buying stocks isn’t as straightforward as it is for adults. They must often rely on custodial accounts set up by their parents or guardians. These accounts are managed by an adult, with the assets held in trust for the minor until they reach the age of majority. 

My advice, based on years of trading and teaching, is for young investors to engage actively with their custodian to learn about the investing process and the decisions being made with their future assets. This involvement can serve educational purposes, offering practical experience in the stock market under the supervision of an experienced investor.

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Financial Advice from a Professional

Before a minor starts investing, it’s advisable to consult with a financial advisor. Professional advice can tailor strategies to the minor’s long-term financial goals and ensure compliance with relevant laws and regulations.

Legal Guardian or Parental Consent

For minors who wish to invest in stocks, doing so under a custodial account managed by a parent or legal guardian is necessary. This arrangement ensures that the minor’s investments are made wisely and are in compliance with legal standards.

Tax Implications on Investments Made Under Age 18

Investments made for minors are not exempt from taxation. The income generated from these investments can sometimes be taxed at the parent’s rate if it exceeds a certain amount. Understanding the “kiddie tax” is crucial for planning how to invest on behalf of a minor effectively.

Can You Buy Stocks for Kids?

Yes, buying stocks for kids is possible through custodial accounts. These accounts provide a way for children to have investments in their name that could potentially grow over time, providing financial benefits as they reach adulthood.

What Is a Custodial Account?

A custodial account is a financial account held by an adult for a minor. Two main types of custodial accounts include the UGMA and UTMA accounts, which can hold investments such as stocks, bonds, and mutual funds until the minor reaches adulthood.

4 Main Types of Custodial Accounts

Custodial accounts provide a legal structure through which minors can own stocks, bonds, and other assets before they reach the age of majority. There are primarily four types of these accounts:

Custodial Brokerage Account

A custodial brokerage account allows stocks, bonds, and other securities to be bought and sold on behalf of a minor. This account is managed by an adult until the child reaches the age of majority.

Navigating the day trading landscape can be challenging, especially for young investors who might not have $25,000 to meet the typical day trader account minimum. Understanding how to use a broker like Robinhood for day trading without the $25K can open up more opportunities for aspiring day traders. For practical tips and strategies on maximizing your day trading potential with limited funds, check out our guide on how to day trade on Robinhood without $25K.

Custodial IRA (Traditional or Roth)

For minors with earned income, a custodial IRA can be a great way to start saving for retirement early. Whether it’s a Traditional or Roth IRA, these accounts can invest in stocks and are governed by the same rules as IRAs for adults, offering valuable tax advantages.

Coverdell Education Savings Account

The Coverdell ESA allows money to be saved for a child’s education expenses in an account where investments can grow tax-free until distributed.

529 Plan

A 529 plan is another educational savings account where investments can grow tax-free. It can be used for various educational expenses at eligible institutions, making it a versatile tool for future educational costs.

Why Buy Stocks for Your Kids Before They Turn 18

Investing in stocks on behalf of your children can set them up financially and provide them with a practical education in managing finances. From a young age, children can learn about the importance of saving, the basics of investing, and the principles of financial responsibility. 

This head start is not just about accumulating wealth but about embedding sound financial habits early. As a trader and a teacher, I’ve seen firsthand how early exposure to the markets can foster a savvy financial mindset among the youth, preparing them for bigger financial decisions down the line.

Potentially Give Them a Head Start

Investing early in stocks can give children a financial head start, allowing them to benefit from compounding returns over many years. This early start can be crucial in building significant capital over time.

Teach Them About Investing Early

Introducing children to the concepts of investing, the stock market, and financial planning at a young age can set the foundation for sound financial habits later in life. This education can empower them to make informed financial decisions as adults.

Considerations Before Buying Stocks for Children

Investing for children isn’t just about opening an account and starting to buy stocks. It requires thoughtful consideration of several factors:

Diversification

When investing for children, diversifying the investments to include various asset classes beyond just stocks, such as bonds and mutual funds, can reduce risk and improve potential returns over time.

Taxes

Understanding the tax implications of investing for children, including the potential impact of the “kiddie tax,” is essential to ensure that investments are not only profitable but also tax-efficient.

Account Ownership

Consider who will own and control the account and the investments within it. Once children reach the age of majority, they will gain full control over the custodial accounts, which includes making decisions about the investment direction and withdrawals.

What to Consider About Retirement Accounts

When considering retirement accounts for young investors, it’s essential to understand the different types of accounts available and their long-term benefits. Whether setting up a Roth IRA under a custodial account or exploring other retirement savings options, the key is to start early. Investing in retirement accounts from a young age not only takes advantage of tax benefits but also maximizes the potential growth through compound interest. 

As a seasoned trader, I’ve seen the profound impact early investing can have on long-term financial security. It’s important to choose the right type of retirement account that aligns with future financial goals and to manage contributions carefully to optimize growth over time.

For young traders looking to diversify their portfolios, penny stocks might be an intriguing option due to their low price point and potential for significant returns. However, the volatility and risks associated with penny stocks require a well-thought-out strategy and thorough research. Understanding the nuances of penny stock trades can help young traders make informed decisions. For insights into navigating the complexities of penny stock investments, check out our guide on investing in penny stocks, which provides valuable information for those starting out.

Key Takeaways

• Early Investment Is Crucial: Starting to invest in stocks at a young age can significantly compound future earnings. The earlier you begin, the greater the potential for substantial financial growth due to the power of compound interest.
• Legal Frameworks Are Supportive: There are various accounts and methods that legally enable young people and even children to invest in the stock market, each with its own set of rules and benefits.
• Education Is Key: Educating young investors about the stock market, the principles of investing, and the discipline required for trading can set a solid foundation for their financial future.
• Consider the Risks and Responsibilities: While investing early has its perks, it also comes with risks and responsibilities that must be carefully managed, especially when investing on behalf of minors.

There are a ton of ways to build day trading careers… But all of them start with the basics.

Before you even think about becoming profitable, you’ll need to build a solid foundation. That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up.

You can check out the NO-COST webinar here for a closer look at how profitable traders go about preparing for the trading day!

Are you ready to start your trading journey? Let me know in the comments!

Frequently Asked Questions

Can I Buy One Share of a Stock?

Yes, you can buy just one share of a stock. Many brokers offer fractional shares, allowing investors, especially beginners and young traders, to invest in high-priced stocks with smaller amounts of money. This makes stock investing more accessible to a broader audience, allowing for diversified portfolios without requiring substantial initial capital.

Where Can I Learn More About the Basics of Trading and Investing?

There are numerous resources available for learning about trading and investing. Online platforms, finance-focused websites, and broker educational hubs offer articles, tutorials, and courses that cover the basics and advanced strategies. Engaging with these resources, along with monitoring market trends and analysis, can provide valuable insights and improve trading skills over time.

What Happens Once the Minor Turns Adult?

When a minor for whom a custodial or other investment account has been established reaches the age of majority, control over the account typically transfers to them. They can then make their own investment decisions and withdraw funds from the account. It is crucial for the transitioning adult to be educated about their financial responsibilities and the potential tax implications of their investment decisions.

What Is the Minimum Age to Open Brokerage Accounts for Stock Trading?

In most countries, the minimum age to open brokerage accounts and engage in stock trading is eighteen. However, in some places like the United States, minors under the age of eighteen can participate in stock trading through a custodial account managed by an adult. The age of majority, which is twenty-one in some states, may affect the ability to trade independently without such custodial arrangements.

How Do Commissions and Fees Impact Stock Trading on Different Exchanges?

When trading stocks, whether on major exchanges or over-the-counter markets, traders must consider the impact of commissions and other fees. These costs can vary significantly between different brokerage accounts and trading platforms. Understanding how commissions affect the profitability of trading activities, especially when engaging in frequent buying and selling of equities or indices, is crucial for managing your financial strategy effectively.

Can Anyone Regardless of Age Invest in Over-the-Counter Markets?

While there are no legal age restrictions for owning stocks, including over-the-counter equities, the ability to buy stocks directly is typically restricted to those over the age of eighteen or twenty-one, depending on local regulations. Younger individuals interested in the stock market can invest through custodial accounts, where a guardian or parent manages the investments until they reach the age of majority.

What Types of Orders Are Common in Equity and Index Trading?

In equity and index trading, various types of orders can be used to manage investment strategies effectively. These include market orders, which execute immediately at the current market price, and limit orders, which set a specific price limit for buying or selling stocks. Understanding the right order type to use based on your trading goals and market conditions can significantly impact the success of your transactions.

What Are Examples of Things to Consider When Choosing a Company to Invest In?

When deciding which company to invest in, consider various factors including the business model, financial health, and market position. For example, evaluate the company’s revenue streams, debt levels, and profitability. Also, assess whether their products or services are competitive and sustainable within their industry. Reviewing cash flow statements can provide insights into how well the company manages its cash, an essential factor for maintaining operations and funding growth. Understanding these elements can help you determine if a company is a good investment opportunity.

How Do Companies Use Cash From Sales to Grow Their Business?

Companies utilize cash from sales to expand their business in several ways. This might include investing in new product development to meet evolving consumer demands or entering new markets to increase their customer base. Additionally, companies might use cash to improve their existing operations, such as upgrading technology or facilities, which can lead to greater efficiency and higher production capacity. Evaluating how a company plans to use its cash can provide investors with an idea of its growth potential and overall financial strategy.