How to Invest as a Teenager
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Investing isn’t something most teenagers care about. After all, teenagers usually aren’t worried about having enough to buy a house or retire. But the truth is their significant benefits too investing as a teenager.
Investing is a crucial wealth-building tool that can help almost anyone reach their financial goals. Instead of leaving all of your money in a savings account, or worse, spending it, make your money work for you by investing.
What is investing?
“Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit” – Investopedia.
Throughout this article, I’ll be discussing how to invest as a teenager –specifically in the stock market – but there are many other assets you can invest in besides stocks, like cryptocurrency, real estate, precious metals, and startups. As a teenager, stocks are a good place to start investing because they’re relatively straightforward. Once you’re comfortable with investing in the stock market, it’s a good idea to diversify into other areas.
Why investing matters
Investing is one of the most important financial skills to learn because of three reasons: it’s passive, scalable, and compounding. These three factors are what make investing the most reliable way of increasing your net worth.
A crucial factor that makes investing in the stock market so lucrative is that it is primarily passive. Although it’s important to regularly check in on your portfolio, most people probably only have to spend a few hours a month maintaining their investments after the initial work of putting together a portfolio.
Stock market investing is also scalable because of its passivity. Once you’ve already decided what stocks and funds to put in your portfolio, you can easily invest more money based on your portfolio’s percent allocations.
But the most important principle that makes investing just to good to pass up, is compound interest.
“Compound interest is interest earned on money that was previously earned as interest.” – thebalance.com
As a teenager, you can leverage the power of compound interest to benefit from long-term exponential growth. The early you start investing, the faster you can start taking advantage of compound interest. As a teenager, you can begin investing in the stock market by opening a custodial investment account.
How to start investing as a teenager:
As a minor (someone under the age of 18), you’ll have to open a specific account called a UGMA account, known as a custodial investment account.
“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.” – investapida.com
Even though you can’t invest by yourself as a teenager, you can still buy, own, and sell stocks as long as your transactions are approved by the parent or guardian (custodian) you open your custodial account with.
The best custodial accounts
Choosing which brokerage to open your custodial account with is an important decision to make. Each brokerage has unique differences like trading fees, interface, fractional shares, the number of stocks offered, etc. Understanding these differences will allow you to make an informed decision about which brokerage is best for you.
There are dozens of brokerages to choose from, but based on my research and experience, these are the three best brokerages for teenagers: Stockpile, M1 Finance, and Charles Schwab.
Stockpile
Stockpile is a unique brokerage because it is designed to help kids and teenagers learn about and start investing. All of its features are tailored towards minors, from fractional shares to convenient gift cards, but what really sets it apart is that it’s the only brokerage that allows the beneficiary of a custodial account to have their own, separate login.
This is just a fancy way of saying that as a teenager, you would have your own login, separate from your parents, that would allow you to buy, sell, and monitor stocks. However, you would still have to get approval to transact, meaning before you make a sale or purchase, your parent would have to press the “approve” button from their login.
Even though there are many pros to using Stockpile as a brokerage, there are certainly a few cons. The two biggest cons are the trading fees and trade execution. Every time you place an order, you’ll be charged a 99¢
fee. Although this may not sound like much, for teenagers who are only investing a few hundred or thousand dollars, this can significantly eat into your returns. An additional con of using Stockpile is its trade execution. When you wish to buy or sell a stock, your trade will be executed at the stock’s closing price at the end of the trading day. Unfortunately, this means you have significantly less control than a traditional brokerage.
M1 Finance
M1 Finance is another untraditional brokerage. What sets M1 finance apart from other brokerages is its unique feature allowing you to create “Pies.” M1 Pies essential allow you to create pies where you chose which companies to invest in and what percent of the pie each stock should make up. Then you can invest into your pies, and the money will automatically be invested based on your allocations.
Although M1 finance doesn’t allow you to have a separate login from your custodian, M1 finance is a great brokerage.
I (a teenager myself) now use M1 finance for most of my investing because of its excellent interface, fractional shares, and the unparalleled control and precision it gives you, allowing you to diversify your portfolio easily.
Although M1 Finance is an excellent brokerage, it does have some cons, the biggest being its annual fee. To open a custodial account, you have to have M1 Plus, an annual membership giving access to exclusive perks that unfortunately cost $125. This is way too much money to pay even though M1 Finance is an amazing brokerage… luckily theirs a workaround.
Currently, M1 Finance offers a 1-year free trial of M1 Plus. What you can do (of course, with the help of your parents) is sign up for the M1 Plus free trial and immediately turn off auto-renew. Then, you can open a custodial account. Even once the 1-year free trial runs out, your custodial account will remain open, and you’ll still be able to use it as you were (except for the M1 Plus perks,) all without spending a dollar.
M1 Finance’s other main con is that similarly to Stockpile, it has a morning trading window, which is the only time you can buy or sell stocks. If you have M1 Plus, you’ll also have access to an additional afternoon trading window, but these trading windows significantly reduce the control you have over the prices you buy and sell stocks at.
Charles Shwab
Charles Schwab is different from the two other brokerages I mentioned so far in that it’s a very traditional brokerage. It doesn’t have any special features, but it’s an overall good brokerage, with 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.
If you don’t care about monitoring your investments from a separate login and would rather have fast and free transactions with a wide variety of stocks to invest in, Charles Schwab is a good choice.
You can read more about the best custodial accounts for minors in this article!
Custodial account taxes
When you make a profit from investing, you will have to pay taxes on any money you made from stocks that you sold. For example, if I bought a share of a stock for $100 and sold it when it reached a value of $150, that $50 would be taxed. However, if you waited a few more years to sell the stock, you wouldn’t have to pay taxes until you actually sold the stock.
For minors (people under the age of 18), there are specific tax laws:
“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
So unless you make over $1,050 in profit in a year, you won’t have to pay taxes. Keep in mind tax laws are often subject to change, so it’s important to stay up to date and do your own research.
Money in custodial accounts is 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
Understand the basics of stocks
“A stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. Units of stock are called ‘shares'” – Investopedia.
Depending on supply and demand, two factors influenced by a variety of things like the companies performance, monetary policy, and world events, stock prices change over time. Investors buy stocks of companies they think will do well, betting that their stock price will go up in the long term.
Evaluating what to invest in
Understanding how to evaluate which stocks to invest in is a skill that takes a long time to develop, but there are a few important things to do before investing in a company:
- Research the company so that you understand them
- Consider the company’s growth opportunities
- Make sure the company has an advantage over its competitors
- Evaluate what the risks are to a companies success
- Think about investing in index funds and ETFs to easily diversify
You can read my full article about evaluating stocks here!
ETFs
Investing in ETFs (exchange-traded funds) is a simple way to reduce the risk of your portfolio and invest in a diverse group of companies.
ETFs are a group of many securities (financial assets that can be traded) that you can invest in under one ticker symbol. Vanguard Total Stock Market ETF (VTI), for example, is comprised of every stock on the US stock market. This means that you would own a small portion of every company on the US stock market if you invested in the fund.
ETFs are a great way to diversify your portfolio or invest in a specific sector/theme.
“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
Diversification can’t guarantee your investments won’t lose value, but investing in them does help mitigate risk.
ETFs also have the benefit of requiring much less research than individual companies. Rather than having to understand a companies value proposition and future growth opportunity, you can invest in an ETF and bet on the economy (or a particular theme/sector) doing well.
Avoiding future mistakes
Learning to invest as a teenager will also help prevent you from making mistakes as an adult when there’s more money on the line. As you start investing, you’ll probably make many mistakes, but you’ll learn valuable lessons along the way.
You’ll also develop risk tolerance. When you first start investing, it can be tempting to sell stocks even if they only go down a few percent. Over time, you’ll feel more comfortable with your investments and won’t make the mistake of selling a stock because you lost a little bit of money.
Investing vs. Saving
Investing is a crucial wealth-building skill, but that doesn’t mean you should invest all of your money. Because the stock market is unpredictable in the short term, it’s important to have savings in addition to investments, and you should remember that investing is not a substitute for saving. Generally speaking, you should only invest money that you know you won’t need for the next few years; otherwise, your subjecting yourself to irresponsible risk.
