Can Teenagers Invest in the Stock Market?

Can Teenagers Invest In The Stock Market?Teenagers can invest in the stock market, but not in the traditional way. The United States requires an individual to be 18 or 21 (depending on the individual state laws) in order to invest directly in the equities markets.

Although teenagers can not invest directly in the stock market, there are some types of accounts that can be used to invest money for your child’s future, and teach them a valuable lesson on growing and managing their money.

If a teenagers parents are happy with their child’s desire to invest in the stock market, they have the option to open a custodial account. These accounts are set up by adults, but they are in the name of the child. The child’s social security number is used, and the account is controlled by the adult until the child is 18 or 21, again depending on the individual state laws.

Types Of Custodial Accounts

There’s two types of custodial accounts. They are  Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfers to Minor’s Act (UTMA) accounts.

UGMA accounts usually start with a cash gift from the adult, while a UTMA account is opened with the transfer of stocks from the adult.

You may expect tax to be deferred to the child when they become an adult, but unfortunately this is not the case. However, there is a slight tax bonus, as the first $1,800 of UTMA’s and UGMA’s is not taxed, but after that it will be taxed as if it was the adult’s money. This is commonly referred to as “kiddie tax”.

Once the minor becomes an adult, most stock brokers will let the custodial account be transferred over to a regular stock trading account.

There is also the option of investing in a 529 plan for educational expenses, which can be an excellent option when saving for college.  529 plans vary by state, but most offer excellent tax benefits, and your investment grows tax free as long as the money is used for educational expenses.  Keep in mind that the money from a 529 plan must be used for education in order to realize the tax benefits of these accounts.

It is a good idea to shop around for these types of plans, as the investment selections and tax benefits will be different from plan to plan.  You are not limited to purchasing a 529 plan in either the state you live in, or the state your child will attend college in so it pays to look around for the plan that best suits your needs and objectives.

How To Get An Account

Many stock brokerage firms offer these types of accounts. I spoke to a few brokers and asked them and found that both Tradeking and Optionshouse offer UGMA’s and UTMA’s. However, the popular brokerage Zecco said they do not offer these types of accounts at the present time.

Although teenagers can not invest directly in the stock market, it is never to early to teach them how to save and invest their money. Involving your teenager in the process of researching stocks for potential investment, showing them the power of compounding their returns, as well as the basic of placing orders and money management can be valuable, life-long lessons for your teenager.

So in answer to the question Can Teenagers Invest in the Stock Market? the answer is yes. I think it’s an excellent idea for younger people to get some knowledge of money and investing.

Millions of Americans have little idea when it comes to managing money and as a result have got themselves into frightening amounts of debt.  It is only by educating ourselves and the future generations as to the fundamentals of money management that real and lasting wealth can be realized.