Can You Buy Stocks at 16? How Minors Can Invest

Many individuals, particularly those around 16, are interested in investing in the stock market. A growing interest in early financial literacy often prompts questions about how minors can participate in investment opportunities. Understanding the legal framework and available pathways for young investors is an important step in navigating the financial landscape.

Why Minors Cannot Directly Buy Stocks

Individuals under the age of majority, which is typically 18 years old in most states, lack the legal capacity to enter into binding contracts. This legal principle exists to protect minors from potentially unfavorable agreements due to their limited experience or judgment. Since purchasing stocks involves entering into a contractual agreement with a brokerage firm, minors are legally prevented from opening and managing investment accounts on their own.

While the age of majority is 18 in the majority of U.S. states, some exceptions exist, such as Alabama and Nebraska where it is 19, and Mississippi where it is 21. This legal restriction means a minor cannot independently execute the necessary paperwork to buy, sell, or manage securities.

Investing for Minors Through Custodial Accounts

Custodial accounts provide a legal and structured method for minors to invest in stocks and other assets. These accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), allow an adult to manage investments on behalf of a minor beneficiary. The assets held within these accounts are irrevocably owned by the minor, though the adult, known as the custodian, retains control until the minor reaches a specified age.

UGMA accounts permit holding financial assets such as cash, stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, fine art, and intellectual property, in addition to securities. The custodian is responsible for making investment decisions that are in the minor’s best interest, while the minor is the legal owner of the assets.

How to Open a Custodial Account

Opening a custodial account involves a straightforward process, initiated by an adult at a financial institution that offers these account types. The adult, who will serve as the custodian, must provide personal identification details. This includes their Social Security number or Tax Identification Number, contact information, and sometimes employment information.

Information about the minor beneficiary is also required, such as their full name, date of birth, and Social Security number. The application can often be completed online. Once the application is approved, the account can be funded through various methods, including electronic transfers from a linked bank account or by transferring existing securities.

Account Management and Tax Considerations

Once a custodial account is established, the designated custodian manages the investments, making decisions for the minor’s benefit. While the custodian controls the assets, the minor is the legal owner, and the assets cannot be reclaimed by the custodian. Upon reaching the age of majority, the assets held in the custodial account must be transferred to the now-adult beneficiary, giving them full control. This age varies by state, typically falling between 18 and 21, though some UTMA accounts may allow transfer as late as age 25.

Investment income generated within a custodial account is subject to specific tax rules, often referred to as the “kiddie tax.” This tax was designed to prevent high-income individuals from shifting investment income to children to take advantage of lower tax rates. The kiddie tax applies to unearned income, such as interest, dividends, and capital gains, for children who meet certain age and income thresholds.

For the 2025 tax year, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s rate, and amounts above $2,700 are taxed at the parent’s rate. Parents can either have the child file their own tax return using Form 8615, or elect to report the child’s unearned income on their own tax return using Form 8814.