The Best Custodial Accounts for Teenagers in 2021
In this post, I’m going to be ranking the best custodial accounts for teenagers in 2021!
Choosing the right brokerage to open a custodial account with is an important, and often overlooked part of investing as a teenager. There is no perfect brokerage that is the best option for everyone; the right brokerage for you depends on your situation and priorities.
I also want to start by saying that this article is meant for teenagers who want to be involved with their investments and choose the best brokerage to do that. That being said, all of the information in this article is applicable to both parents, and minors.
What is a custodial account?
A custodial account is an account that allows kids and teenagers (minors) to invest in the stock market.
“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – Investopedia.
Having a custodial account allows you to invest in the stock market, even as a teenager. With approval from your custodian (the adult you set up your account with), you can buy, sell, and own stocks.
However, before you start doing any of that, you have to choose a brokerage to open a custodial account with. This post will go over the three best brokerages based on my experiences and research.
1. Stockpile
What sets Stockpile apart is that it’s designed to help kids and teenagers learn about and invest in the stock market. Using Stockpile, you can learn about what stocks are, how the market works, and make purchases with your custodian’s approval. Stockpile’s best feature is that it gives you a separate login, allowing you to conveniently monitor your investments over time.
Pros:
1. Separate login
Stockpile’s most significant advantage over other brokerages is that it gives minors a separate login. This means that you can decide what stocks to buy and sell with the approval of your parents.
How it works is while you and one of your parents are setting up your custodial account, you’ll create a separate login attached to your email. Then you can connect your bank account (or your parents) to the custodial account.
Once your account is opened and funded, you can browse the thousands of stocks and funds Stockpile has listed. Once you’ve found and researched a stock to invest in, you can click “buy” and decide how much money to invest in it. Finally, your custodian will receive an email notifying them of your request. Then they can Either approve or deny the request.
Once you’ve purchased stock(s), you can track their price throughout the day and watch your money grow over time. Additionally, you can connect your bank account (if you have one) so that your custodial account is just like a regular investment account. The only difference being that your custodian has to press “approve” for a trade to execute.
If you want to learn more, you can read my full review of Stockpile here.
2. Fractional shares
Another huge benefit that Stockpile provides is fractional shares.
“A fractional share is when you own less than one whole share of a company. Fractional shares allow you to purchase stocks based on the dollar amount you want to invest, so you may end up with a fraction of a share, a whole share, or more than one share” – Schwab.
Fractional shares are especially important for teenagers, who are likely investing only a few hundred or thousand dollars. Fractional shares allow you to invest in companies like Amazon, with a share price of over $3000 that you otherwise wouldn’t be able to afford.
Because it gives you the ability to invest in more companies, the option to purchase fractional shares is a big factor to take into consideration when you’re choosing a brokerage.
3. Gifting
Another unique feature that Stockpile provides is the ability to redeem gift cards. Stockpile is the only brokerage that sells gift cards that can be redeemed for stock in the company of your choice. On holidays or your birthday, you can ask for Stockpile gift cards to help you grow your investment portfolio.
4. No trading fees
Stockpile has recently eliminated their 99¢ trading fee. This means it is completely free to invest on Stockpile. Previously this was one of the biggest problems with stockpile, because when you are probably investing a small amount of money, this fee significantly cuts into your returns.
This also demonstrates that Stockpile is continuing to improve their platform.
Cons:
1.Transfer fee
Another con to Stockpile is its $75 transfer fee. To transfer stock out of Stockpile and into another brokerage, you have to pay a $75 transfer fee.
2. Trade execution
Another of Stockpiles cons is that it only executes trades at the end of the day.
When you place a trade, it’s executed at the next end of a trading day, at whatever the price is then. This means you have less control over the exact price you pay than you would with a traditional brokerage.
3. Price updates
Another minor thing that’s always bugged me about Stockpile is their imprecise price date. Even though it isn’t a huge deal, the fact that Stockpile only shows updated stock prices every 15 minutes is something to be aware of before choosing them as your brokerage.
2. M1 Finance
M1 Finance is a brokerage that allows you to create “pies” where you can choose percent allocations for stocks.
“Simply select your investments and add them to your Pie. Each holding will represent one “slice.” Set the target weight of each slice. These percentages correspond to the portion of your overall portfolio. Just fund your Pie, and money automatically flows into your investments to align with your target asset allocation. Easily visualize portfolio performance. Slices that outperform their target weight will grow, while underperforming slices will shrink. As you continue to fund your portfolio, money will automatically flow into your investments to bring slices back to their targets. Add, remove, or edit slices at any time, so you’re always invested exactly how you want” – M1 Finance.
Pros:
1. “Pie” feature
M1 Finance’s unique feature allowing you to create “Pies” is the biggest thing that sets M1 Finance apart. Being able to choose percent allocations for each of your stocks and automatically invest into those allocations creates a seamless investing experience.
Personally, I now use M1 finance for most of my investing because of the unparalleled control and precision it gives you.
2. Diversification
Another one of M1 Finance’s biggest strengths as a brokerage is that it allows you to easily diversify your investment portfolio.
“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences.” – Investopedia
With M1 finances pies, diversification couldn’t get easier.
3. Fractional shares
Just like Stockpile, M1 Finance also allows you to purchase fractional shares. This is another big benefit over traditional brokerages.
4. Interface
Another one of my favorite things about M1 Finance is its interface. M1 Finance has easy to navigate website and app with charts to help you visualize your portfolio.
Using its app and website, you can research stocks, edit your Pies, see which holdings are under or overweight, and easily buy a stock or invest in a pie.
Additionally, the app’s colorful and interactive charts are very helpful, making it easy to view, analyze, and edit your stock market portfolio.
Cons:
1. Trading windows
M1 only has one trading window during which trades are executed. Like Stockpile, no matter what time you place an order, the stock will be purchased at its price during the morning trading window. This means you have less control over the exact price you pay for a stock.
M1 plus users are also allowed to use the afternoon trading window, in addition to the regular morning window.
Although the trading window system isn’t great, stock prices usually don’t fluctuate that much for it to make a noticeable impact on your long-term investment return.
2. Limited selection
Another of M1 Finance’s cons is its limited stock selection. Personally, I’ve found this to be M1 Finance’s biggest problem.
M1 Finance chooses which stocks it offers based on a variety of requirements such as volatility and volume. Annoyingly, this means that they don’t offer many small or volatile companies and funds.
3. M1 Plus
Perhaps M1 Finance’s biggest con is that to open a custodial account, the custodian must have M1 plus, a service that costs $125 a year.
M1 Plus is a service that M1 finance offers, giving you access to all of their financial services. With M1 plus, purchasers benefit from numerous perks, including the ability to open a custodial account.
$125 is a lot of money, especial for teenagers who are likely investing relatively small amounts of money. Luckily, there’s a way around this. Currently, M1 Finance is offering a free, one-year trial of M1 Plus. You and your custodian can open an M1 finance account, get the free trial of M1 plus, open a custodial account, and immediately turn off auto-renew.
This means that once your M1 Plus free trial is over, you will be downgraded from M1 plus. However, even once your trial is over, your custodial account will still be “open and active:”
“Custodial accounts will remain open and active even if the custodian downgrades from M1 Plus” – M1 Finance.
3. Charles Schwab
Unlike the other brokerages I’ve discussed so far, Charles Schwab is a very traditional brokerage.
Suppose you don’t care about having a separate login or a highly customizable portfolio, opting to instead make an investment and only check in on it once every few months. In that case, Charles Schwab is the right brokerage for you.
While Charles Schwab doesn’t have unique features like Stockpile or M1 Finance, Charles Schwab does boast some desirable features.
“Schwab gives you access to a wide range of investments with no minimum opening balance, no monthly fee, and free trades of Schwab ETFs and accounts on the Schwab Select List of mutual funds” – The Balance.
So if your planning to make infrequent investments and won’t be check and making edits to your portfolio frequently, Charles Schwab’s benefits may make it a good option for you.
Pros:
1. Market orders
Unlike M1 Finance and Stockpile, Schwab allows you to place market orders. This means that your orders will be executed within seconds of when you place them. This means that you have much more control over the exact price you pay for stocks.
2. Has no trading fees
Another considerable benefit to Charles Schwab is that it has no trading fees. Unlike Stockpile, you don’t have to worry about how frequently you’re placing orders because they’re completely free.
Cons:
1. Poor interface
I used to use Charles Schwab as my custodial account for around six months, but I switched to M1 Finance because of its far superior interface.
Charles Schwab’s custodial accounts have a terrible interface that is confusing and misleading. It’s hard to find how much buying power you have, view what percent of your portfolio a stock makes up, or navigate the website in general.
Although it may sound like something you would get used to, this constant annoyance is a significant factor to consider for those planning on using the website a lot.
2. No fractional shares
Another possible deal-breaker is Charles Schwab’s lack of fractional shares. Because they don’t offer fractional shares, most teenage investors would be precluded from buying expensive stocks like Google or Amazon.
Depending on what stocks your buying, this may not be a big issue, but Charles Schwab not offering fractional shares is important to be aware of before choosing them as your broker.
The Takeaway
When you’re choosing a brokerage to open a custodial account with, there are many factors to consider. Based on my research and experiences, Stockpile is the best brokerage because of its separate login, followed by M1 Finance for is Pies that allow you to easily diversify, with Charles Schwab in third for its preciseness and lack of fees.
, Click here for a more comprehensive and up-to-date version of this article!
Investing is a great way to build wealth and can help almost anyone reach their financial goals. Instead of leaving all of your money in a savings account, make your money work for you by investing.
I started investing when I was 12, and the process was very confusing. There was very little information about investing for anyone under the age of 18, so hopefully, this post provides a good starting point for anyone in the same position.
Even though I’m by no means an expert on the subject of finance, I can hopefully provide a helpful perspective as a teenager myself.
Why investing matters
There are three reasons that make investing an extremely important skill to learn: it’s scalable, passive, and compounding.
Scalable
Investing is easily scaleable, unlike traditional work where you put in time to get money and you have a limited amount of money you can make. But with investing, you can invest as much money as you have, and add more and more to your investment portfolio.
Passsive
One of the best parts about investing is that it’s almost completely passive. This means that – depending on your investing strategy – it doesn’t require much work after your initial investment.
Compound interest
Over time, your investments will produce compound interest.
“Compound interest is interest earned on money that was previously earned as interest.” – thebalance.com
This is the concept that causes investments to grow exponentially. The sooner you start investing, the faster you can start taking advantage of compound interest.
Investing vs. Saving
Even though investing can be very beneficial, you shouldn’t invest money you know you will need in the near future. Due to the volatile nature of the stock market, your investments could lose value, and it may take time to recoup your losses. Because of market volatility you should only invest money that you’re not going to need for at least a few years.
Because your investments may loose value in the short term, Investing is not a substitute for saving and you should continue to save money even if you start investing.
Understand the basics of stocks
A stock share represents partial ownership of a company, including its assets and earnings. Stocks can be traded between investors on stock exchanges. Stocks change value because of changes in supply and demand.
Other investments
While stocks are the most common investment, there are other things you can invest in, such as bonds, commodities, cryptocurrencies, real estate, and more. In this post, I’m only going to be talking about stocks because they are the most common investment and are accessible for teens who may not have much money.
You also can’t own a lot of alternative investments (such as crypto currency or real-estate) in a custodial account directly although there are ways around this limitation.
Custodial accounts
“The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities” – investopedia.com.
This means that even though you can’t invest by yourself as a teenager, you can still buy, own, and sell stocks with the approval of the parent or guardian (custodian) you make your custodial account with.
Custodial account taxes
You may have to pay taxes on the money made in your custodial account. Keep in mind tax laws do change frequently so make sure to do your own research.
“Any investment income—such as dividends, interest, or earnings—generated by account assets is considered the child’s income and taxed at the child’s tax rate once the child reaches age 18. If the child is younger than 18, the first $1,050 is untaxed, and the next $1,050 is taxed at the child’s rate. Anything over $2,100 is taxed at the parent’s rate.” – schwabmoneywise.com
Funds in your custodial account are also considered for financial aid.
“Custodial accounts can have a heavy impact on financial aid. Because the money in a custodial account is your child’s asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college.” – schwab.com
Opening a custodial account
This article by thebalance.com does a great job explaining the best custodial accounts and their unique features and serves as a great place to start your research. Personally I use Stockpile’s custodial account because it gives you the most control over your investments. I will write a full review of Stockpile to help you understand how it works, and it’s pro’s and con’s. The actual process of opening an account once you’ve decided on who to open the account with depends; however, it should be relatively straightforward.
Choosing what to invest in
When choosing where to invest your money, there are a few things you should defiantly think about. One significant factor in determining where to put your money is risk level. Some companies are volatile, meaning their price changes quickly and dramatically. Investing in volatile companies can lead to high returns, but there is also a significant risk that the stock could quickly lose value, at least in the short term. Well-established companies are usually less volatile and generally offer a more constant increase in value over time. However, the upside is typically a lower.
This, of course, is a broad generalization, and a companies volatility is less important than its underlying value in the long run.
ETFs
One way to manage the risk of your investments is by investing in ETFs (exchange-traded funds). ETFs are large groups of securities (financial assets that can be traded). For example, Vanguard Total Stock Market ETF (VTI) tracks the entire US stock market. This means that you would own a tiny portion of every company with a stock listed on the US stock market. Pretty cool, right?
One of the benefits of investing in ETFs is that they help you diversify.
“Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. The benefits of diversification hold only if the securities in the portfolio are not perfectly correlated—that is, they respond differently, often in opposing ways, to market influences.” – investopedia.com
Although diversification doesn’t guarantee your investments won’t go down in value, it does help mitigate risk.
The takeaways
Below is a summary of the key points of the post:
- Investing is an important way to grow wealth.
- A share represents partial ownership of a company, including its assets and earnings
- Stocks aren’t the only thing you can invest in.
- Custodial accounts allow you to invest with your custodian’s approval.
- Custodial accounts have tax benefits.
- Custodial accounts are considered for financial aid.
- Think about volatility when you invest.
- ETFs are large groups of financial assets that can be traded.
- While ETFs are by no means the only way, they do help you diversify your stock portfolio.
Hopefully, this post helped you understand how to start investing as a teenager! This isn’t a comprehensive guide, but it should be a good place to start your investing journey. Thanks for reading!
