How Old Do You Have to Be to Buy Stocks?

April 5, 2021
financial literacy

You want the children in your life to have an amazing future full of opportunities. One of the best ways to do that is to start investing in their future today.

There’s a lot to know about investing for children. It’s not as simple as opening a traditional brokerage account like you would as an adult. 

There are age requirements for brokerage accounts, and young people who want to start buying stocks will have to do so with the help of a parent or another loved one.

Don’t worry, though — there are plenty of ways to start investing for a child and prepare them for the future they deserve.

How Old Do You Have to Be to Buy Stocks?

Investing is an excellent way to grow wealth. But it’s important to note that it’s not equally accessible to everyone.

Usually, an individual must be 18 years or older to open a brokerage account. Some states won’t even let people invest until 21. As a result, young people who are interested in growing their finances have to find a different way to invest.

The good news is that there are still plenty of means by which adults can invest for the children in their life, giving those kids a head-start in their financial future.

4 Traditional Brokerage Account Alternatives

Kids can’t open traditional brokerage accounts, but there are still plenty of ways to start investing for the kids in your life.

Custodial brokerage account

A custodial brokerage account is one of the best ways to invest for a child you care about.

There are two types of custodial brokerage accounts: UGMA (Uniform Gifts to Minors Act) accounts and UTMA (Uniform Transfers to Minors Act) accounts. The two are very similar; the main difference being in the types of assets they can hold. Both are perfectly suitable for most families.

Custodial brokerage accounts can hold many different types of assets, including stocks, bonds, mutual funds, index funds, insurance policies, annuities, and cash.

Any adult can open this type of account for a child. The adult that manages the account is the custodian.

The ability for other loved ones to contribute will depend on the platform you’re using. With EarlyBird, once the account is open, all of the loved ones in a child’s life can easily contribute through the app. 

The money within a custodial account can be invested in stocks and other types of investments, so that it can grow throughout the child’s life.

No matter who manages the account and who contributes, the money in the account belongs to the child. Contributions to this type of account are irrevocable gifts, meaning parents and other adults can’t just take them back.

Once the child reaches adulthood, they take full control of the account and can use the money for any purpose.

If you’re looking for a custodial brokerage account to invest for your child, EarlyBird might be the right choice.

EarlyBird provides a simple way for loved ones to set up an UGMA account for a child. Then, everyone in the child’s life can collectively invest in their future by contributing to the account.

EarlyBird makes it easy to decide on your investment strategy. The company offers five ETF portfolio options that range from conservative to aggressive. The custodian can also choose to invest up to 5% of the child’s portfolio in values-based funds, investing in companies that support important causes.

Once the child reaches adulthood, the money will be there waiting for them, ready to help fund their goals and dreams.

529 plan

A 529 plan is a type of investment account intended to save for education expenses. These accounts come in two different forms. 

The first is a prepaid college plan where parents can lock in the price of college and pay in advance. The other is a college savings plan where parents can invest to grow funds for their child’s education.

529 plans come with tax advantages that make them attractive to families. The money in the account grows tax-free. And as long as you spend it on qualified education expenses, there are no taxes on your withdrawals.

The downside of 529 plans is that the money is intended for college-related costs. If your child wants to spend the money on anything that doesn’t qualify as an educational expense, they’ll pay taxes on the earnings, as well as a 10% penalty.

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Custodial IRA

Another option for investing for kids is to open a custodial individual retirement account (IRA). Families can invest in either a traditional IRA or Roth IRA as long as the child has earned income.

It might seem premature to start saving for retirement at such a young age, but ultimately it gives your child’s savings that much more time to grow and compound.

The downside of this type of account is that the money is intended for a very specific purpose. Your children will face many large expenses throughout their lives, and the money may be more useful before they reach their golden years.

Parent’s brokerage account

Parents also have the option of buying stocks for their kids in their own brokerage accounts.

In this case, the child doesn’t have any real ownership over that stock. You might have their future in mind when you buy it, but the stock isn’t in their name, and they have no legal claim to it when they reach adulthood.

The other downside of this route is that money earned in your brokerage account doesn’t come with the same tax advantages as UGMA and UTMA accounts, 529 plans, and custodial retirement accounts.

Other family members may also feel less comfortable contributing when the funds are in the parent’s name, rather than the child they want to give to. 


Why Buy Stocks For Kids?

Make an investment in their future

Chances are, your child is going to face many huge expenses in their early adult years. 

In their late teens and early twenties, young people begin incurring costs such as purchasing their first car, paying for college, moving to new cities, getting married, buying homes, starting families, and more.

Unfortunately, most of these things come with a high price tag.

By buying stocks for your kids, you can give them a huge head-start on reaching these goals.

As Bank of America Vice Chairman Keith Banks has said, “The reality is, it’s time in the market, not timing the market.” 

It means that the most important part of investing is having your money in the market for as many years as possible, allowing it to grow and compound.

When you start investing when your child is young, the money will have many years to grow. Just a small amount over your child’s first 18 years can have an incredible impact on their early adult years, and even the rest of their lives.

Teach them about financial literacy

Schools don’t teach basic financial concepts like saving and investing. It’s largely up to families to make sure their children leave home with an understanding of these topics.

When you open a custodial account for your child, you can use it as a teaching opportunity. Invite your child to join in the investment decisions, and allow them to watch their money grow.

They’ll start their young adult years with an understanding of financial literacy and the importance of saving for their future goals.

Allow them to take ownership of the funds

When you buy stocks for a child in a custodial brokerage account, the assets in the account all belong to the child. Even when they don’t have access to that money, it’s theirs.

Throughout their childhood, they can dream of all the goals they can achieve with that money, from starting a business to going to medical school. This creates a sense of ownership over the money, inspiring children to dream big.

How to Buy Stocks for Kids

1. Find the best place to contribute

With the rise of fintech, there’s no shortage of ways to buy stocks online. With so many brokers and investment platforms to choose from, it can feel overwhelming to decide where to invest.

If you’re planning to invest for a child in your life that isn’t your child, you might start by talking to their parents about how best to contribute.

The family may already have a custodial account set up. If not, you might encourage them to open one, or you could even open it yourself.

EarlyBird provides a simple process for families and other loved ones to open an UGMA account for a child.

2. Make your first contribution

Once you know where to start investing, it’s time to make your first contribution. Thanks to compound interest, the earlier you start investing, the better. 

Even if the child in your life is just a baby, it’s definitely not too soon to start.

In addition to that first contribution, you might also think about how you’d like to invest throughout the child’s life. 

Many parents and loved ones opt to make a recurring monthly contribution to their child’s investment account to make sure the money has the best chance to grow.

3. Purchase the stocks

UGMA accounts can hold many different types of investments. While this is great news, it also might feel overwhelming to parents and loved ones who aren’t experienced investors or who don’t have the time to research individual stocks and bonds.

EarlyBird takes care of this for you. Whoever opens the UGMA account with EarlyBird will have the option of different ETF portfolios to invest in. Once they choose the portfolio mix, any cash that is contributed will automatically be used to purchase more assets within that portfolio.

This means you and any other contributors can easily give money without worrying about which stocks to invest in or how to keep the portfolio balanced. 

4. Invite friends and family to contribute

The more people are investing in a child’s future, the more that money can grow.

One of the true benefits of opening an UGMA account with EarlyBird is how easy it is for loved ones to collectively invest in a child’s future.

Any friend or family member can download the EarlyBird app and contribute money to a child’s account. And as an added bonus, EarlyBird allows gift-givers to leave a short video message, which serves as a meaningful keepsake for the child.

4 Things to Consider When Buying Stocks for Children

Time horizon

When you start investing, your time horizon is one of the most important considerations. Time horizon simply refers to the number of years before you expect to need the money you’re investing.

One of the benefits of investing when a child is young is that you’ve got a long time horizon to work with. If you start investing when a child is born, you have a time horizon of 18 years before they’ll likely need the money.

Not only does a long time horizon give your money more time to grow, but it also empowers you to invest a bit more aggressively in their early years.

Diversification

An important step in the investment process is diversifying your portfolio. Diversification means splitting your money up across many different assets to make sure you aren’t taking on too much risk.

There are two ways you can diversify a portfolio. First, you can diversify across asset classes. An example would be putting some of your money into stocks and some into bonds. If the stock market crashes, your bond investments would still likely provide a return, and vice versa.

The other way to diversify is within asset classes. An example would be, instead of investing all of your money into the stock of a single company or industry, you’d buy stock in many companies or industries.

When you open an UGMA account with EarlyBird, your portfolio is automatically diversified. Many of the accounts hold both stocks and bonds. And even those that are invested in just one or the other are well-diversified across companies and industries.

Taxes

If you’re investing for your kids, keep in mind there will be some tax consequences.

Any money earned in a custodial brokerage account is considered unearned income for the child. The first $1,100 of earnings is tax-free. The next $1,100 is taxed at the child’s tax rate. It’s not until the account earns more than $2,200 in a year that it will be taxed at the parents’ tax rate.

Account ownership

Each custodial brokerage account has a custodian, who is the adult that manages the account. They make all of the investment decisions, but it’s important to note that they don’t own the money.

From the time the account is open, everything within it legally belongs to the child. Once you contribute money, you can’t take it back. It’s an irrevocable gift to the child.

Once the child reaches adulthood, they take full control of the account. The custodian no longer has any control over the account, and the child can use the money for any purpose.

Some parents may have concerns about their children having access to such a large sum of money at a young age, so it’s important to know about this before you open the account.

Conclusion

Any brokerage firm will generally require that someone be at least 18 years of age to open a brokerage account and buy stocks. Luckily, this doesn’t mean you can’t invest for the children in your life and make financial contributions to their future.

Using custodial accounts like an UGMA account from EarlyBird allows loved ones to collectively invest in a child’s future.

Download EarlyBird on the app store today to start investing in the kids you love.

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