Thanks to the principle of compounding interest, it’s a great idea to start investing as soon as possible. If you invest your money early, you leave yourself more years until retirement, allowing your initial investment to gain more interest and compound.
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But how old do you have to be to invest in stocks? If you’re a teen, is it legal to start investing with the money you earned from your part-time job?
Today, we’ll learn a little bit more about age requirements when it comes to investing. We’ll also show you how you can start investing as a minor with a custodial account and how you can educate yourself now for the best possible entry into the market when you’re legally able to do so.
Why Are There Age Restrictions on Trading Stocks?
The minimum age to invest in the stock market is 21 in most states. If you live in California, the District of Columbia, Kentucky, Louisiana, Maine, Michigan, Nevada, New Jersey, South Dakota, Oklahoma or Virginia, you can start investing in the stock market once you turn 18.
Why do you need to be 18 to invest in the stock market? You need to be 18 before you can start investing because buying and selling stocks involves signing a contract. In the age of the internet, it can be easy to forget that when you buy or sell a share of stock, you’re signing a contract agreeing to the sale by placing your order.
A minor cannot legally enter a contract, and any contract signed by a minor is considered unenforceable. As a result, brokers won’t allow you to open a brokerage account until you reach your state’s minimum investing age.
Can You Still Contribute to an Investment Account?
As a minor, you can’t own or operate your own brokerage account. However, you can gain access to the financial markets with the help of a custodial account.
A custodial account is a special type of brokerage account that’s owned by a parent or legal guardian of a minor. However, the assets within the account are legally held in the minor’s name until they reach the minimum age to begin investing.
With a custodial account, you can ask your parent or legal guardian to deposit your money and make trades on your behalf. You may dictate which assets you’d like to buy or sell to the custodian of your account, who is usually your parent.
However, your guardian must be the one administering the account and placing the orders. Once you reach your state’s minimum age to begin investing, you’ll be able to begin executing orders yourself and administrative controls will be passed to your name.
Preparing to Invest in the Stock Market
Operating your own brokerage account isn’t the only way to learn more about the stock market. If you know that you’re interested in trading, there are steps that you can take right now to increase your knowledge and prepare for the best possible market entry when you do reach the age of majority.
Learn Stock Trading Terms
There are endless educational resources you can use online to learn about stock trading, investing, and the different types of securities you can purchase. Some things you might want to research include:
Types of Tradable Assets
Did you know that most brokers support the purchase and sales of more than just common stock? You may want to learn more about the different types of tradable securities you can invest in, including options contracts, futures, ADRs, forex and cryptocurrencies. You’ll also want to become familiar with the similarities and differences between ETFs and mutual funds.
The Difference Between Stock Types
Many beginning investors are also surprised to learn that there are multiple types of stocks. Familiarize yourself with the differences between blue chip stocks, penny stocks, value stocks, growth stocks, etc. and the risks and benefits of investing in each.
The Many Types of Buy and Sell Orders
There are multiple types of buy and sell orders you can use to purchase shares of stock. Familiarize yourself with the multiple types of stop-loss, limit, and market orders and when to use each one.
Publicly-traded companies are required to regularly disclose certain financial information to the public. These filings help stock buyers understand a little more about the companies they’re investing in.
Learn how to read an SEC report, and familiarize yourself with some of the most common terms you’ll see when experts talk about a stock’s output and future. Familiarize yourself with terms like “dividend,” “dividend yield,” “earnings per share,” “PE ratio,” and more.
Take Courses While You’re Still in School
If you’re still in high school and you think that you may want to pursue a career as a stockbroker, investment manager, or financial planner in the future, there are classes you can take to gain additional exposure to the market. Depending on your school’s offerings, you may want to explore the following areas.
Classes on economics will help you learn more about market cycles, how international and domestic markets interact, and how political forces may influence prices at home.
Many would-be stock traders are surprised to learn about how large of a role ratios, probabilities, and averages play when it comes to making informed market decisions. Courses in statistics or other high-level mathematics can help you better understand how traders and brokers use these formulas to achieve more profitable results from their trading.
Business administration courses will help you learn more about how corporations operate and issue shares of stock. This will help better prepare you to analyze and participate in initial public offerings (IPOs) when you begin investing.
Finance classes are another excellent choice for anyone interested in entering the stock market. These courses will introduce you to the basics of investing, as well as some of the more complex rules that surround investment banking, hedge funds, and more.
If you do think that a career in investing or finance is right for you, set up a meeting with your guidance counselor to discuss your school’s specific offerings. Some schools even offer co-op programs with local community colleges to help you start getting credit for your learning before you make it to the university level.
“Play” the Market
While you can’t trade with real money if you’re underage, there’s nothing stopping you from playing the stock market on paper. Pull out a notebook and assign yourself an initial dollar amount in your “brokerage account.”
From there, browse the market using a stock screener – FINVIZ is an excellent resource that’s free to use and educational as well. Search for stocks by price, volatility, average daily volume and more.
You may also want to begin with the stocks of companies that you’re already familiar with, like AT&T or Disney. Trade on paper for a few weeks, recording your buy and sell prices to develop a trading strategy without risking any of your own money.
If you find yourself making consistently profitable trades, you’ll be off to a great start when you do enter the markets for real.
Subscribe to Newsletters
Now is also a great time to find and follow a market news source or to begin reading financial newsletters. Explore a few different websites and news outlets that cover the domestic and international stock markets.
Bookmark the home pages of a few websites that you find informative and easy to read. Be sure to check in with your new source a few times a day to familiarize yourself with the differences between pre-market news, post-closing news, and mid-day activity reports.
You can also prepare yourself for a successful future career in stock trading by researching brokers now. There are dozens of brokerages offering online discount accounts that you can use to buy and sell stocks from your phone or computer. Doing your research now can save you a pile of work later when you’re legally able to open your own account.
Every broker will allow you to buy and sell stocks and ETFs, and almost every broker also offers real-time trading charts. The best broker for you may vary depending on which tools and details you prefer. When you compare brokers, look for these key factors:
Ease of Use
Every broker uses its own platform — some platforms are beginner-oriented and aimed at complete market novices, while others are oriented for a more experienced set of traders who need in-depth charting tools.
As a beginner, you’ll probably want to start with a broker that offers a simple and streamlined platform. Most brokers offer video tutorials on their websites that demonstrate how the platform works.
Look for a platform that prioritizes simple order placement and shows you how to use each of its tools.
Fees and Commissions
Many brokers charge some form of account fee or per-transaction commission in exchange for executing your trades. Search for a broker that offers low fees and commissions. Or, better yet, open an account with a broker that doesn’t charge commissions at all.
You’re never too old to learn something new about investing. Look for a broker that offers a wide range of video tutorials, courses, ebooks and webinars to enhance your trading and help you build a solid strategy.
If you already know which broker you want to use, you may want to contact a representative and set up a demo account. Many brokers offer demo or dummy trading accounts that allow you to practice using the software and executing fake trades until you’re able to open a full account.
Making Your Way Towards a Solid Investing Career
In most parts of the country, you cannot buy or sell stocks until you turn 21 — though the minimum age to trade is 18 in many states. This is because buying and selling stocks involve the use of contracts, and a minor cannot sign a valid contract.
If you have money now and you want to start investing, you might want to ask your parent or legal guardian to open a custodial account for you. A custodial account is an account owned by a parent or guardian until you reach your state’s age of majority. You can deposit your own money into a custodial account, direct trades, and research assets — but your parent or guardian needs to be the one to enter the buy and sell orders.
There are also plenty of ways you can learn more about the market as a teen before you start investing. Familiarizing yourself with common stock trading terms and taking courses on business and finance in school can set you up with some solid knowledge now that you’ll use for years to come. You can also begin researching brokerages and learning how to use screening tools using dummy accounts.
By following these steps you can be ahead of the curve when comes to investing and planning for the future.