TEEN BANKING

THE ULTIMATE GUIDE TO Investing FOR TEENS

Two teens checking their investing accounts

Your teenage years might feel a little early to invest, but the truth is the earlier you get started, the better off you’ll be. In fact, Warren Buffet, one of the most famous investors in history, bought his first stock when he was just 11 years old!

But like most things in life, it’s important to learn the basics before jumping in the deep end—especially if you’re still in highschool. That’s why we put together an ultimate guide to help you with everything you need to know about investing as a teenager.

Read ahead to get started on your investing journey!

Hand with Coin

What is a Stock?

A stock is a piece of ownership in a company, individually known as a ‘share’ of a company. When you buy a stock, you become a ‘shareholder’ and are entitled to your share’s worth of a company’s value. That means if a company’s total value goes up, the value of your shares go up the same amount.

Not every company has stock you can buy. To be able to buy stock in a company, it has to be ‘publicly listed’, which means it meets certain legal requirements, typically size. This is why you often can’t buy stock in local businesses.

Chart in Computer

What Is The Stock Market?

The stock market is just like it sounds: the place where stocks are bought and sold. However, it’s not actually one place, but instead a collection of stock exchanges, which are marketplaces that connect stock buyers with stock sellers. The largest and most famous of these exchanges is the New York Stock Exchange. 

When you're just getting started, it's not super important to know the names of the individual exchanges. Just understand that you are participating alongside others in a regulated marketplace with rules designed to protect you.

Fearless Girl statue at the New York stock exchange
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What Makes Stock Prices Go Up or Down?

The funny thing is there’s no simple answer to this question. Stock prices are ultimately determined by what people are willing to pay for them, and people are influenced by everything from the news to company rumors, to fears about the general economy. This means there’s a lot of randomness with stock prices.  

However, the randomness in stock prices tends to be short-term. Over the long run, it’s typically strong, innovative companies that are consistently profitable that tend to see their stock values rise. Professional stock traders try to take advantage of short term changes in price—buying and selling quickly— while investors typically buy and hold stock for years. 

Investing tip: Holding stock for the long term can be very powerful compared to trying to time buying and selling short term. See our section below on compound interest for more

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How Do I Buy Stocks?

To buy stocks you need to open what’s known as a ‘brokerage account’. Stock brokerages are licensed by the government, and you need to go through them to access stock exchanges. Fidelity, E*Trade, and Charles Schwab are some well known stock brokerage firms you may have heard of.

To buy a stock, you need to first add money to your brokerage account (by connecting a bank account) and then place a “buy” order for a specific stock. Copper is a great option for teens looking to open a bank account. While you can set a specific price you’re willing to pay, many people choose to pay “market price”, which is the current value of a stock as determined by what everyone else is willing to pay at that moment in time. 

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Can I Buy Stock As A Minor?

Not directly. The U.S. requires you to be at least 18 years old to purchase stocks on your own. However, while you as a minor cannot legally invest in stocks, you can own stocks in your name. This is either done through a gift (often from a relative such as a grandparent), or through what’s known as a ‘custodial account’

What is a Custodial Account?

A custodial account is a special type of account offered by brokerages, which gives account ownership to a minor (you), while the parent still legally controls and manages it—including approving all transactions and withdrawals. However, they cannot withdraw the money for themselves, it legally belongs to you.

Certain brokerages like Fidelity also offer specialized Youth Accounts, which let teenagers control the trades on the account, while their parents can set alerts to monitor trades and transactions. These types of accounts are best if you want to begin selecting your own funds and stocks to invest in. 

Copper is also working on an investing product built specifically for teens. Download Copper now to get first access when our investing product goes live.

Note for Parents: Custodial accounts are irrevocable, meaning the assets legally belong to the minor and they receive full account control once of legal age, either 18 or 21 years old.

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Mutual Funds and Index Funds

Mutual funds and index funds are investments that pool your money together with other investors to buy a group of stocks (and other assets) collectively on your behalf. The main reason people buy these funds is to reduce their risk. 

The reason mutual funds and index funds are considered less risky is because they diversify your investments. Because you own a fraction of the fund rather than individual stocks your money can be spread across hundreds of smaller companies, even if you don’t fully own any. This makes it so one company’s failure is way less damaging to you personally. 

While there’s a lot to understand about mutual and index funds, the primary takeaway is they are an alternative to picking individual stocks, that still allow you to get returns from the market. Most financial advisors would say these funds are a safer way for beginners to get invested. 

Pro Tip: If you love researching stocks, but also feel nervous investing all your money in one company, consider a mix of some individual company stocks and a mutual or index fund. 

Phone with Data

Stock Trading Apps

Increasingly, a lot of young people are turning to investing apps like Robinhood, eToro or Webull. You must be at least 18 years old to use these apps. And while these apps are fine to use, there have been calls to caution young people about them, as they often “game-ify” stock investing. This can make stock trading more fun, but it can often cause people to lose sight of the fact that there is real money at stake, leading some young adults to make high risk decisions. 

While we think it’s great to use apps to invest (including Copper, if you're under 18), we strongly recommend you research any app before using it, especially if it’s your first time investing. 

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Investing

The Power of Investing Early

Ask any investing expert what the most crucial factor to growing wealth is and they will undoubtedly say “time”. This is because of something known as compound interest. 

What is Compound Interest?

You can think of compound interest as a snowball for your money. As your investments grow and make more money, that new money is also reinvested—making even more money!

Let’s explain with some numbers. Using the average historical stock return of 10.5% here's what an initial $5,000 investment with monthly recurring deposits would earn you over time:

Initial Deposit
Monthly Deposits
Investment Time Span
5 years
Future Balance

$16,280

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Hot Tip — The above formula is broken out as:
Ok, but what do all those letters mean?
P = Principal = Initial Investment
r = Return = Interest or Return Percent ÷ 100
n = Compound = The number of times your money is reinvested during one year. In this example, we're using monthly, so that's 12 times each year.
t = Time = Number of years
c = Recurring Contribution = The amount you are depositing monthly into your investment account
A = Final Amount = Your initial investment plus monthly contributions plus the interest/return earned

Now let's compare what our investment balance might look like with monthly contributions vs without monthly contributions:

The power of Compound Interest

Without Monthly Contributions
($5,000 Initial)
With Monthly Contributions
($5,000 Initial + $400/month)
After 10 years
After 10 years
After 30 years
After 30 years
After 20 years
After 20 years
$8,433
$14,223
$115,093
$40,460
$39,821
$98,549
$364,662
$1,121,653
After 5 years
After 5 years

In 30 years your $5000 investment would be worth 23 times it's initial value. Once you add in monthly contributions, that number grows exponentially. Using the example above, if you were to start investing at age 15 with monthly contributions, you'd be a millionaire by age 45!

Now considering only ¼ of people start investing before age 25, getting started at age 15 gives you a whole decade extra of compound growth over everyone else. The numbers above should show you just how valuable that is.

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Examples of Teens Investing

If all the above wasn’t enough to get you excited about investing, here are a few examples of how teenagers around the world have successfully harnessed the power of the stock market. 

  • 17-year-old high school senior Brandon Fleisher turned $48,000 into $147,000, by buying positions in small companies he thoroughly researched. Beginning with mock stock trades, Brandon was so successful his parents eventually opened an account to let him invest a portion of their savings.
  • 19-year-old British teen Adam Mlamali made £200,000 through stock trading he taught himself entirely from YouTube. Adam’s interest in space travel led him to become an early investor in Virgin Galactic—more than doubling his initial investment!
  • High school freshman Jack Rosenthal amassed a $120,000 portfolio by starting an investing club at his high school. Each participant invested $1,000 and over Rosenthal’s four years of high school, his investing club grew by over 90 members!
Person with Coin

More on Custodial Accounts (For Parents)

Custodial accounts are often referred to as UGMA or UTMA accounts. These acronyms refer to the Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA), acts that enable parents or guardians to gift cash and securities to minors. The accounts are virtually the same unless you are trying to give real estate to a minor (in which case you must have a UTMA account.)

After the funds are deposited in a custodial account, they become legal property of the child, and are irrevocable. There is a provision to allow withdrawals from the account “for the use and benefit of the minor'' however this is a fiduciary term, and children have been known to sue parents over improperly spent custodial accounts. 

Scale

Which is Better: Custodial Accounts or College Savings Accounts?

It depends. If the goal is to allow your child to take over their free control of their finances in the form of cash, then a custodial account is better. If the goal is to save up for college, a 529 plan or a Coverdell Education Savings Account (ESA) may offer you more return for your dollar.

The main benefit of 529 and ESAs over custodial accounts is that they provide tax-advantaged growth. The flipside is they have contribution limits, and can only be spent on “qualified educational expenses.” Any funds withdrawn for non-educational expenses are subject to a 10% federal penalty. 

An important note: while colleges often include it as part of their overall tuition cost, room and board do NOT qualify as educational expenses. You can find a full list of other non-qualifying expenses on the IRS’s website.

Teen studying in library
List with Pencil

Who Pays the Taxes In My Custodial Account?

Cash and securities deposited into a custodial account are considered gifts, and may be subject to the gift tax if they exceed the annual exclusion limit, which is $16,000 per child (recipient) in 2022. Gifts over this amount will count towards your lifetime exclusion limit ($12.06 million in 2022). Any amount you give over that in your life is subject to tax, even if below the annual limit. The donor (gift giver) is typically responsible for paying the gift tax.

If you’ve set up your child with a custodial brokerage account, they are the ones responsible for paying taxes on gains. The first $1,150 is tax free, and the next $1,150 is taxed at the minor’s tax rate—typically extremely low or 0%. This is known as the “kiddie tax”. The kiddie tax also extends to individuals aged 19-24 who are still listed as dependents, and enrolled as full time students, meaning it’s not too late for college students to take advantage. 

Earnings above $2,300 in a custodial account are taxed at the parent’s marginal tax rate. If your child’s income is entirely from interest or dividends (meaning not from wages), and it totals less than $11,500, you can choose to include their income on your taxes, rather than file a separate return for them.

Growing Money

Can I Set Up A Retirement Account For My Child?

Yes, you can. Both traditional and Roth IRAs can be set up for minors, even if you claim them as a dependent. While IRAs offer tax advantages over a custodial account, they do require the account holder to have their own earned income. This makes them a great option for teenagers with summer jobs, who want to invest for their retirement. 

Note: As most minors will face little to no income taxes, it makes most sense for them to contribute to a Roth IRA rather than traditional IRA.

If your teen has a summer job, they can set up direct deposit for their paycheck with a Copper bank account.

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More Teen Resources

That’s it! You’ve learned the basics of what stocks are, and where and how to trade them. If you’re a teen looking for more resources, check out our complete guide on How To Earn Money As A Teen or our Ultimate Guide To Teen Banking. If you want to get started spending (and saving) your money, download Copper now and get set up with a bank account in minutes.

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Your future is bright if you can master an advanced level money skill like investing before you turn 18. It may help to review some of the more fundamental skills like budgeting and saving first. That way you'll have more money to invest! See the Ultimate Guides below.

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