Can You Invest in Stocks at 14? Here’s How

Investing early offers significant benefits due to the power of compounding. While minors cannot directly purchase stocks, structured avenues exist to facilitate their entry into the investment world. Understanding these pathways allows young people to begin building a financial foundation.

Investing Directly as a Minor

A 14-year-old cannot legally open a brokerage account or directly invest in stocks independently. This limitation stems from contract law, which requires individuals to reach the age of majority to enter into legally binding agreements. In most states, the age of majority is 18 years old, though it varies.

Financial institutions require account holders to possess the legal capacity to understand and agree to terms of service, which minors generally lack. Any contract entered into by a minor is considered voidable, meaning it can be canceled by the minor. This protects minors from unfavorable agreements and prevents them from engaging in complex financial transactions on their own. Adult involvement is necessary for a minor to invest.

Using Custodial Accounts

Custodial accounts are the primary method for minors to invest in stocks and other assets. An adult, designated as the custodian, manages the investments on behalf of the minor beneficiary. This arrangement bypasses legal limitations, as the custodian is legally responsible for the account.

The custodian has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit. While the custodian makes all investment decisions, the assets within the account are irrevocably owned by the minor from the moment they are contributed. The adult cannot reclaim the funds, and the minor gains full control of the assets once they reach the age of majority in their state.

Types of Custodial Accounts

Two primary types of custodial accounts are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts. Both are established under state laws and allow adults to transfer assets to minors without a formal trust. Most states have adopted UTMA, which generally supersedes UGMA where enacted.

UGMA accounts hold financial assets such as cash, stocks, bonds, and mutual funds. Under UGMA, the minor generally gains control of the assets at age 18, though this varies by state. UTMA accounts offer broader flexibility, allowing for a wider range of assets, including real estate, intellectual property, and fine art, in addition to financial assets. The age at which the minor takes control of a UTMA account can extend beyond 18, often to age 21, or up to 25, depending on state law. Assets are legally the minor’s property, and any income generated is reported under the minor’s Social Security number for tax purposes.

Setting Up a Custodial Account

Opening a custodial account involves gathering specific personal information for both the adult custodian and the minor beneficiary. Financial institutions, including brokerage firms and banks, offer these accounts. The custodian will need to provide their full legal name, current address, date of birth, Social Security Number, and a government-issued identification.

For the minor, required information includes their full legal name, date of birth, and Social Security Number. Once this information is collected, the account can be established, and funds can be transferred to begin investing on the minor’s behalf.