Can You Invest in Stocks Under 18? Here’s How

Individuals under 18 generally cannot directly invest in the stock market due to legal restrictions. This article explores legal and practical pathways through which investments can be made on behalf of a minor, primarily focusing on adult-managed accounts.

Direct Stock Ownership Restrictions for Minors

The primary reason individuals under 18 cannot directly invest in the stock market is that minors lack the legal capacity to enter into binding financial contracts. Brokerage firms require clients to sign such agreements to open accounts, execute trades, and manage investments. Since minors are not deemed competent to form these agreements, they are barred from these activities.

This legal protection safeguards minors from financial obligations or risks they might not comprehend. Opening a brokerage account, buying or selling shares, or holding securities in their own name is not permitted for someone under the age of majority, which is typically 18 in most states. This fundamental legal barrier necessitates specific structures for investing on behalf of a minor.

Understanding Custodial Investment Accounts

Custodial accounts provide the primary legal mechanism for minors to own investments, even though they cannot directly manage them. These accounts are established by an adult, known as the custodian, who manages the assets for the minor’s benefit until they reach adulthood. The two main types of custodial accounts are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) accounts.

UGMA accounts are suitable for holding financial assets such as cash, stocks, bonds, mutual funds, and insurance policies. The custodian maintains control over the assets, making all investment decisions and managing the account. While the custodian controls the assets, the minor is the irrevocable legal owner of the funds and securities within the account.

UTMA accounts offer a broader range of permissible assets compared to UGMA accounts. In addition to financial assets, UTMA accounts can hold other types of property, including real estate, intellectual property, and even tangible personal property. This flexibility makes UTMA accounts a versatile option for various forms of wealth transfer to a minor. Both UGMA and UTMA accounts function similarly in terms of custodian responsibility and minor ownership.

Contributions to these accounts can come from various sources, including parents, grandparents, or other relatives, and are considered irrevocable gifts to the minor. The custodian has a fiduciary duty to manage the assets prudently and solely for the minor’s benefit. This duty requires the custodian to act in the best financial interest of the minor, ensuring that investments are made wisely and any withdrawals are used for the minor’s direct benefit, such as education, healthcare, or general welfare.

Taxation of Minor’s Investment Income

Investment income generated within custodial accounts, such as dividends, interest, and capital gains, is subject to specific tax rules, primarily the “Kiddie Tax.” This tax was designed to prevent high-income individuals from shifting investment income to children to take advantage of lower tax brackets.

For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free. The next $1,350 of unearned income is taxed at the child’s own tax rate. However, any unearned income exceeding $2,700 is subject to the Kiddie Tax and is taxed at the parent’s marginal income tax rate, which is typically higher than the child’s rate.

The minor’s Social Security Number is used for all tax reporting related to the custodial account. Parents may need to file IRS Form 8615 or, in some cases, elect to report the child’s income on their own tax return using IRS Form 8814. Understanding these thresholds and reporting requirements is important for managing tax liabilities associated with a minor’s investment income.

Transitioning Account Control at Adulthood

A significant feature of custodial accounts is the mandatory transfer of control to the beneficiary upon reaching the age of majority. This age, typically 18 or 21 depending on the state and the specific type of custodial account (UGMA or UTMA), marks the point when the custodian’s management responsibilities cease. The custodian is legally obligated to transfer full control and ownership of all assets within the account directly to the now-adult beneficiary.

The process of transferring control usually involves paperwork completed with the brokerage firm where the account is held. Both the former custodian and the adult beneficiary typically sign documents to re-register the assets in the beneficiary’s name. Once this transfer is complete, the individual gains complete control over the assets. The former custodian’s role is entirely concluded, and they no longer have any legal authority or responsibility over the funds.