Investing guide for teens: Skills, account types & tips to know

Becoming a smart investor isn't something that automatically happens when kids reach adulthood—it's a skill they have to develop. Investing for teens, with supervision, allows them to learn lessons that will pay off over the course of a lifetime. Whether you're a student who's curious how markets work or a parent trying to teach good financial habits, now's a great time to get started.

The earlier, the better

When you start investing at a young age, you give your money a longer lifetime to potentially grow and learn early on the importance of putting your money on a track to reach a specific goal. Plus, teenagers who have someone with investing experience to guide them on best practices can gain a strong foundation of knowledge to continue building on in their adult years.

From video games to new clothes, teenagers usually are looking forward to their next exciting purchase. While rewarding themselves now can be fun, it's important to keep an eye on future expenses, too. Encouraging them to invest part of their income ensures they'll be able to tackle upcoming needs, whether it's transportation costs or college tuition. By choosing how they want to spend, save and invest their money, teens are learning to prioritize what really matters to them—both today and down the road.

One of the most important financial lessons that children can learn is the potential benefits of delayed gratification. With investing, that eventual payoff can be even more pronounced because of compound growth. Help your teenager realize that reinvesting their returns gives their new earnings the potential to generate even more earnings. Be realistic in explaining that invested money can involve gains as well as losses but that the snowball effect of compounding gives investments the opportunity to recover and get bigger over time.

It can help to combine this with talking about goals. Point out that putting money into the market now and waiting can help your teen work toward their objectives, whether it's paying for college or buying a car.

Today, more than ever, it's important for youth to develop realistic expectations about how investments work. When their introduction to the stock market involves hearing about flashy, high-risk strategies (looking at you, crypto)—having them invest modest amounts, under your supervision, can help them develop a more down-to-earth perspective.

There's a lot for young people to learn, to be sure, but there's no need to dive in headlong. Start small by explaining these foundational pieces:

Differences between securities

In general, you should know what you're buying before you buy it. Give your teen an overview of all kinds of assets, including stocks, bonds, mutual funds and exchange-traded funds, explaining the risks and possible rewards of each.

The importance of diversification

When your teen purchases shares of stock or other assets and tracks their performance over time, they'll notice that not every security grows in value—some actually may lose money. By witnessing those mixed outcomes, they learn that it's important to create a portfolio of different companies (or bond issuers) in different industries.¹

Factors that can affect pricing and returns

How in-depth you want to go is up to you and your teen, but they should be aware of some underlying reasons that can drive changes in their investments—a company's strong quarterly report, a downturn in the economy, national and international events, etc. An early introduction to the variables at play can make them a more savvy investor in the long run.

One more thing to know before opening an investment account for a teenager is how old you have to be to buy stocks and other market-based investments. The minimum age to have a traditional brokerage account on your own is 18. You may want to let them help you make decisions with your own account, or you can use certain kinds of other accounts to help your teen invest with your supervision.

The great thing is that by being involved in an account with them, you'll have chances to casually impart other important financial know-how, such as how to manage their emotions about money and how to gauge their risk tolerance and investment style.

More options than ever are available when it comes to investing for teens and tweens, and most accounts require a parent to approve purchases. Here are some you might consider:

Custodial accounts

UTMA and UGMA accounts are so named for the laws that govern them—the Uniform Transfers to Minors Act and the Uniform Gifts to Minors Act. These custodial accounts are owned by the child but are managed by an adult. So while you'll have to execute the trades as the custodian, you can allow your child to have input as it's their money. Once the child reaches the age of majority in your state, the custodian hands over control of the account to the child. You can open an UTMA or UGMA account through most brokerage firms as well as many mutual fund companies, banks and insurance firms.

If your teen has earned income from a job, they also can contribute to a custodial Roth IRA. These investment vehicles have a substantial advantage over other brokerage accounts—you can withdraw the earnings completely tax-free after age 59½. Between this tax-favored status and the effect of compounding, even small amounts contributed now can have a large financial impact later in life. For example, assuming an average rate of return at 7%, a 16-year-old who makes a $100 contribution to a Roth IRA every year could have $30,438 in the account by age 60. For comparison, if they waited to start those same annual contributions until age 30, the investment would only be worth $10,869.²

Youth brokerage accounts

Some brokerage firms have investment accounts specifically designed for young people where they manage their own money. These accounts typically have limited account fees and allow the purchase of fractional shares, making them ideal for beginning investors. They'll also be taking on real risk, however, so this may be a better fit for older youth with some investment experience or those who only intend to contribute a modest amount of money.

Debit card accounts

Some teen-oriented debit cards and allowance apps allow them to buy fractional shares of popular U.S. stocks. While the parent typically owns these accounts and approves purchases, teens can request trades through the app. This investing feature can be a great way to explore the stock market for the first time, but you do want to look out for costs. Some charge fixed subscription fees that can offset the gains you may achieve when small balances are involved.

529 education savings accounts

While they can't create a 529 account until they turn 18, youths can contribute to a parent- or grandparent-owned account for which they're the beneficiary. Their investment today helps them pay for their college education and reduces their dependence on loans down the road. These accounts typically offer a menu of mutual funds and target-date funds, so it's not the ideal way to learn about investing in individual stocks and bonds. But it's a good opportunity to discuss the benefits of diversification as well as the crucial tax benefits of these education accounts.

Investments always carry certain risks, and this is an important fact for you to discuss. When you think your teenager is ready to play a more active role in managing their own savings and investment choices, here are some ways you can aim to make their experiences positive:

Choosing a type of investment account involves certain trade-offs. Brokerage accounts, for instance, provide the flexibility to make penalty-free withdrawals at any time. A Roth IRA, on the other hand, offers valuable tax advantages but requires a more long-term commitment. Together, you can select a vehicle that helps them achieve their specific investing goals.

By putting their own hard-earned money on the line, young people have a powerful incentive to make wise investment decisions. Have them explore different companies and evaluate their financials. For example, encourage them to look up the business's price-to-earnings ratio compared to its competitors. Or ask them whether the company is more likely to gain or lose customers based on industry trends. They may have a particular interest in corporations that align with their interests and values, giving their choices a personal touch.

By nature, even a diversified portfolio of stocks likely will fluctuate in value over short periods of time. Make sure your teenage investor is ready for that. A sudden spike in prices may get reversed a day or a year later.

When they're starting out, you may suggest they invest cash they've received from a milestone event like a birthday or graduation. But it's also important to let them know the benefits of routinely contributing over time. You even can introduce the concept of dollar-cost averaging,³ where they invest a fixed amount every time they get a paycheck or receive an allowance. In doing so, they'll actually acquire more shares of a company when its price has dropped, lowering the average cost of their investment.

By learning how market-based investments work with a responsible adult's guidance, young people have the ability to become more confident investors when they reach adulthood. To get the most out of their contributions, consider meeting with a local financial advisor, who can recommend a strategy based on their unique needs—and be an expert they can turn to for years to come.