Can you buy stocks if you're under 18?

May 20, 2021
financial literacy

Investing in the stock market can be incredibly rewarding for children. Not only does it teach them critical financial literacy skills, but it also enables them to build a portfolio that can grow by leaps and bounds over time.

Translation: if children start investing early, they’ll be able to start generating assets that will empower them with financial freedoms later in life.

Age can be a barrier for kids who want to invest in stock — but fortunately, there are several investment vehicles available that allow you to help the children in your life start investing.

This guide explains how old you’ve got to be to buy your own stocks, ways that minors can invest in stocks, and why custodial accounts like EarlyBird are one of the smartest ways to start investing.

Can you buy stocks if you are under 18?

There are plenty of financially literate teenagers out there who’d love to buy stocks and start investing before they hit college. But unfortunately for those individuals, you’ve got to be 18 years or older to trade on the stock market.

Why can’t you buy stocks until you’re 18?

If you want to start trading shares, you must first open up a brokerage account with a stockbroker. Yet to set up a brokerage account, just about every brokerage firm will require you to be at least 18 years old.

If you are old enough to buy stocks on your own, the process is actually quite simple.

There is a wide range of stockbrokers that you can visit online or in-person to set up an account. 

If you’re not sure about brokers or whether different apps are legitimate, you can find out whether a broker is legally registered using the Financial Industry Regulatory Authority (FINRA) official BrokerCheck tool.

(Image source)

Once you’ve found a broker that you trust, you’ll need to provide identifying information like your name, address, contact details, social security number, and more. You’ll also probably be asked to provide information about your experience buying stocks and your financial goals.

A lot of brokerage accounts will then require you to link to a bank account to ensure your brokerage account is always funded so you can buy stocks.

There are plenty of apps out there that will let you do all of this — but be careful because some are better than others. 

More importantly, if you’ve got a minor in your life wanting to learn more about investing and buying stocks for real, setting up a brokerage account for them won’t solve your problem.

That being said, a traditional brokerage account isn’t the only way to buy stocks.

In fact, there are loads of ways you can buy stocks and invest for the future — and a couple of these ways can actually be used as workarounds that enable under-18s to indirectly buy stocks and invest. 

These investment vehicles all come with their own set of pros and cons, and they all have different rules about how investments are made and who actually owns them.

The most common investment vehicles adults use to help minors buy stocks are:

  • Guardian accounts
  • Custodial accounts
  • 529 plans
  • Roth IRAs

To help you wrap your head around each of these investment vehicles and how they can help you buy stocks alongside or for the children in your life, we’ll quickly break down the pros and cons of each for you.

How can minors invest in stocks?

If you’re under 18 years old, you can’t legally buy stocks on your own using a traditional brokerage account. But as we’ve already touched upon, you do have a few options that will enable you to invest alongside or under the guidance of an adult in your life.

There are plenty of investment vehicles minors can use to indirectly purchase stocks and securities, but here’s a breakdown of the most popular.

Guardian brokerage accounts

A guardian brokerage account is a type of brokerage account that the parent or guardian of a minor can open on behalf of their underage child.

Guardian brokerage accounts are taken out in the parent or guardian’s name — giving the adult full legal title to the account assets. Likewise, all capital gains and tax liabilities generated from a guardian brokerage account belong to the adult.

Translation: a child has no ownership whatsoever of the assets and investments kept in a guardian brokerage account. Using this account type, you can add the name of a child in your life onto your account, but they have no legal standing.

Because everything in a guardian brokerage account belongs to the parent or adult, it also means that what’s in the account will be taxed at the parent’s tax rate rather than the child’s.

Illustration of woman recording increasing investment values

A lot of investment and stock apps marketed towards younger audiences will generally offer this account type to parents — which is a good way to educate kids about stocks but doesn’t actually enable them to take ownership over those investments.

Custodial brokerage accounts

A custodial account is a type of investment account that allows a parent, guardian, other family member, or even friend to open an investing account for a child under 18.

With a custodial account, the adult who opens it manages the money and investments in the account as its “custodian” until the child beneficiary reaches that “age of majority.” 

That age of majority in most states is either 18 or 21 — and when the beneficiary reaches that age, all of the money and assets in the account are theirs.

The most popular type of custodial account is called a Uniform Gifts to Minors Act (UGMA) account

Named for the legislature that created it, an UGMA account can be used to hold a wide range of investments, including stocks, bonds, exchange-traded funds (ETFs), and more. 

There’s also another type of custodial account called a Uniform Transfers to Minors Act (UTMA) account — but those aren’t available in every U.S. state. 

That’s why most people choose an UGMA account.

Unlike guardian brokerage accounts, custodial accounts come with a tax benefit because the assets or investments in the account are legally owned by the child. 

That means the first $2,100 of annual earnings from the account are normally taxed at the child’s lower rate.

Illustration of father and son watching investment grow

Custodial accounts also offer a lot more flexibility than other investment vehicles in terms of what you can contribute for a child’s future and what you can take money out for. Unlike education-specific plans like a 529 plan, custodial accounts aren’t limited in terms of withdrawal rules. 

The beneficiary can withdraw funds for whatever reason once they come of age — and the custodian can withdraw funds on the minor’s behalf as long as the money or assets are being used for the child’s benefit.

Finally, custodial accounts are ideal for individuals wanting to invest more for their child’s future because they aren’t stifled by pesky contribution limits.

There are a couple of different ways minors can take ownership of stock shares using a custodial account. 

An adult can buy stock and then transfer shares to the custodial account for the child’s benefit. 

Alternatively, you can choose a custodial account provider that lets you choose between different investment portfolios. Your provider can then invest in particular stocks or other securities on a child’s behalf.

529 plans

Another popular investment vehicle for children is a 529 plan. A 529 plan is a college savings plan designed to allow adults to set money aside over time to help children pay for college or certain other education expenses when they get older.

(Image Source)

With a 529 plan, you aren’t directly buying stock shares. But when you choose a 529 provider, the cash that you save will then be invested on a child’s behalf in a pre-selected range of investments like mutual funds or ETFs.

Account holders don’t have any say over which stocks or funds a plan might invest in, and so with a 529, you’re going to be pretty limited in terms of your investment portfolio.

Likewise, 529 plans have quite rigid withdrawal requirements because you’re only able to take money out of the account for certain qualified education expenses. 529s are also subject to contribution limits, which vary by state.

Roth IRAs

Another way you can indirectly invest in the stock market before age 18 is through a Roth IRA. A Roth individual retirement account (IRA) is an investment vehicle that allows you to deposit assets and securities and let that nest egg grow tax-free. 

You’ll also benefit from tax-free withdrawals from the account — but only after you reach the age of retirement.

Just like a custodial account, a Roth IRA can be used to hold company stock shares, bonds, ETFs, or other securities. That means you can buy stocks on your kid’s behalf and place it into their Roth IRA. But they won’t be able to benefit from ownership and withdraw anything before they’re retired.

(Image Source)

In most cases, if you try to take money or assets out of a Roth IRA before you hit a certain age, you’ll be fined or have to pay big fees.

Roth IRAs also have pretty low contribution limits. In 2020, the IRS allowed contributions of just $6,000 per year ($7,000 per year if you were over 50) or your total earned income for the year — whichever is lower. 

Note: The ‘earned income’ limit relates to the account holder, not the contributor. So, if the teenager in your life only made $500 babysitting this year, that’s the maximum amount that you (or anyone else) can contribute to their Roth IRA. 

How can you invest in stocks for children using EarlyBird? 

If you’re looking for flexibility and want the children in your life to actually own the stocks you’re buying for them, an UGMA custodial account is going to be your best bet.

There are quite a few custodial account providers out there offering similar plans — but EarlyBird leverages the benefits of investing through UGMA and takes them even further. 

How?

First and foremost, EarlyBird offers investment choices. When you set up an account for a child through EarlyBird, you can choose from five different ETF portfolios with different investments. 

Each portfolio style is totally different, ranging from conservative to aggressive. This enables you and the child in your life to take more control over where money is being invested on the market.

(Image source)

Better yet, EarlyBird offers users the ability to allocate up to 5% of their account to value-based funds. This enables you or the children in your life to invest in socially responsible businesses — you can even automate investments on a recurring basis if you want.

Yet, by and large, one of the biggest benefits of investing using EarlyBird is that it’s the market’s first UGMA custodial account that enables anybody to contribute to a child’s future.

That means a grandma, cousin, uncle, family friend, neighbor, coworker, or anybody else can instantly make a gift to a child’s custodial account. 

When money is deposited through the EarlyBird app, that cash can then be placed into the same investment portfolio you’ve already chosen with the child. This ensures their investments stay diversified.

Friends or relatives can even save video messages to go alongside their financial gifts. When the child gets older, they’ll be able to watch these messages back and truly understand what a huge impact all of those gifts made on their financial future.

EarlyBird’s investment accounts are all held with an SEC-registered broker-dealer and member of FINRA and Securities Investor Protection Corporation (SIPC). 

Are you ready to start investing?

If a child in your life wants to buy stocks before they’re 18, things can get complicated pretty quickly. To trade on the stock market, they’ll need to open a brokerage account — and to open a brokerage account, you’ve generally got to be at least 18 years old.

But don’t despair, because there are several investment vehicles you can check out that allow minors to invest in stocks either directly or indirectly before they hit the age of majority in their state.

Just be careful because some investment vehicles are better than others in terms of tax rules and legal ownership. 

That’s why custodial accounts are generally one of the best options. They’re taxed at the child's rate for the first $2,100 of annual earnings, and the child owns the assets — But the custodian has control over investment decisions and withdrawals until they come of age.

Sounding good so far? Download EarlyBird on the app store today to start investing in the kids you love.