Can You Trade Stocks Under 18? Your Options Explained

Investing in the stock market can be a powerful way to build wealth over time. Can someone under the age of 18 directly trade stocks? Generally, direct stock trading by minors is not permitted due to legal and contractual limitations. This restriction necessitates alternative approaches for young people to participate in the financial markets.

Understanding Direct Trading by Minors

Individuals who have not reached the age of majority, typically 18, generally lack the legal capacity to enter into binding financial contracts. Opening a brokerage account and engaging in stock transactions involves entering into such agreements. Brokerage firms require account holders to be of legal age to ensure they can be held responsible for their financial decisions and obligations.

Due to the legal concept of contractual capacity, minors can often void contracts they enter into. This legal protection for minors makes it impractical for financial institutions to allow them to open direct trading accounts. Consequently, brokerage firms will not open accounts for individuals under the age of majority, as contracts signed by a minor are generally unenforceable.

Investing Through Custodial Accounts

Custodial accounts, specifically those established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are the most common and accessible vehicles for minors to invest. These accounts allow an adult, known as the custodian, to manage assets on behalf of a minor beneficiary. While the custodian controls the account, the assets within it are irrevocably owned by the minor.

UGMA accounts are generally limited to 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, intellectual property, and tangible personal property. UTMA is more widely adopted and often supersedes UGMA, though UGMA remains available.

The custodian, often a parent or legal guardian, manages the assets for the minor’s benefit. The custodian makes all investment decisions and can use the funds for expenses that benefit the minor, such as education or welfare. The account remains under the custodian’s control until the minor reaches the age of majority, which varies by state but is typically 18 or 21. In some states, UTMA accounts may allow for extended custodianship up to age 25. Upon reaching this specified age, the assets must be transferred directly to the now-adult beneficiary, who gains full control.

Investment income generated within these accounts is reported under the minor’s Social Security number. This income may be subject to what is known as the “kiddie tax” rules. For tax year 2024, the first $1,300 of a child’s unearned income is generally tax-free due to the standard deduction, and the next $1,300 is taxed at the child’s tax rate. Unearned income exceeding $2,600 for 2024 (or $2,700 for 2025) is taxed at the parent’s marginal income tax rate.

Using Trusts for Minor Investments

Trusts represent another method for investing on behalf of a minor, generally offering more complexity and flexibility than custodial accounts. A trust is a legal arrangement where assets are held by a trustee for the benefit of a designated beneficiary. This structure allows for greater control over how and when assets are distributed, often extending beyond the age of majority typically associated with custodial accounts.

A key distinction between a trust and a custodial account lies in the ability to set specific conditions for asset transfer and distribution. For example, a trust can stipulate that a minor receives assets at a later age, such as 25 or 30, or even in staggered distributions over time. The trustee, who can be an individual or a financial institution, manages the trust assets according to the detailed instructions outlined in the trust document.

The tax implications of trusts for minors can vary significantly depending on the trust’s structure and type. Income generated by a trust might be taxed to the trust itself, the grantor (the person who established the trust), or the beneficiary, depending on how the trust is designed and managed. While setting up a trust is generally more involved and may require legal assistance compared to opening a custodial account, it provides a tailored approach to managing and distributing assets for a minor’s long-term financial well-being.